CGE models for the Energy-Economy-Environment (EEE) analyses

Written evidence submitted to the environmental audit committee of the UK Parliament for the Sustainability and HM Treasury inquiry

Can Vehicle Efficiency Beat Fuel Efficiency in Cutting Fuel Use?

This paper demonstrates the importance of considering both energy and non-energy efficiency improvements in the provision of energy intensive household services. Using the example of private transport, we analyse whether vehicle efficiency can beat fuel efficiency in cutting fuel use. We find that this ultimately depend on the elasticity of demand for transport, the substitutability between vehicles and fuels and the initial share of fuel use in private transport. The framework also allows to identify 'multiple benefits' of technical progress in private transport by considering both the ability of such policy to reduce fuel demand and to increase the consumer's surplus. We extend the partial equilibrium framework by using computable general equilibrium (CGE) simulations to identify the system-wide impacts on total fuel use of the two alternative efficiency changes. Simulation results suggest that the substitution effects identified in the partial equilibrium analysis are an important element in determining the change in total fuel use resulting from these consumption efficiency changes. However, the identification of associated changes in intermediate fuel demand, plus the potential expansionary effects of the improvements in household efficiency transmitted through the labour market can generate general equilibrium effects that vary substantially from those derived using partial equilibrium analysis

The macroeconomic impacts of the new protocol on Northern Ireland and how they can be mitigated

Geoffroy Duparc-Portier and Gioele Figus use a multi-sector economic model to capture the impact that potential non-tariff barriers and tariffs will have on trade in NI. Simulation results demonstrate that a weaker relation between Britain and the EU will have a greater negative impact on Northern Ireland’s economy. However, this may be reduced by the ability of Northern Irish firms to substitute intermediate inputs from Britain for EU imports

So Which Households Can Benefit from Energy Efficiency and is there an Argument to Fund from the Public Purse? Research Briefing 04

Improving household energy efficiency has a positive impact on a more efficient household’s income. This is because money saved by the permanent reduction in energy bills will be available to spend year on year. An EPSRC funded team at the Centre for Energy Policy and Fraser of Allander Institute at the University of Strathclyde has analysed the macroeconomic expansion likely to follow successful energy efficiency measures. This highlights the multiple dividends of energy savings, boosted GDP, employment and income benefits which result from energy efficiency measures. This latest work begins to explore the impact of focusing policy only on fuel poor households but finds that the more wide-ranging the boost to energy efficiency, the greater the economic expansion is likely to be. The multiple dividends are particularly obvious in the case where all households rather than just fuel poor households are targeted. This is due to both the greater stimulus and limited spending power of low income households. Governments should consider the wider economic and social benefits of spending on energy efficiency when designing energy efficiency policy, evaluating its outcome and making budget decisions

Evaluating the Impact of Pro Environmental Energy Policy in Scotland and the UK : the Case of Increased Efficiency in Household Energy Use

In this thesis, I use multi-sectoral computable general equilibrium techniques to investigate the system wide impacts of improvements in households' energy efficiency use, and technical progress in delivering households' energy services, in Scotland and the UK. The thesis consists of three main, self-contained but correlated essays. The first essay looks the system wide impacts of an illustrative 5% energy efficiency improvement in households' energy use in Scotland and highlights the economic implications of increasing energy efficiency in a regional economy. I find that this results in a small economic stimulus, accompanied by a reduction in energy use that is less than the expected energy savings from the pure energy efficiency increase- the rebound effect. The stimulus is higher when migration of workers is allowed between Scotland and the rest of the UK. However, the higher expansion also delivers a higher rebound in energy use. The stimulus from the higher efficiency in energy use if further enhanced when I consider the impact of greater fiscal autonomy in Scotland, and allow for endogenous government expenditure or tax rates. The second essay analyses the distributional impacts of households' energy efficiency improvements in the UK, focussing the attention on effciency improvements in lower income households. I discuss whether there is an argument for the Government to fund household energy efficiency programmes via a temporary reallocation of current government expenditure or an increase in the income tax rate. While reallocating public spending has short-term negative impacts on demand over the period of the payment, the efficiency improvement delivers a net long-run stimulus However, an increase in income tax adversely affects the real take home wage and delivers a long-term reduction in GDP. In all scenarios, lower income households are able to increase their energy consumption and their income by approximately the same amount. The third essay looks at the consumption of energy intensive services using the example of private transport. Here I argue that private transport should be modelled as a household self-produced commodity, composed of refined fuels and motor vehicles. By using a simple partial equilibrium model, I show that technical improvement in motor vehicles can reduce refined fuels use, when there is enough substitutability between the two inputs, and depending on the price elasticity of demand for private transport. By taking the case of the UK, and using a CGE model, I find that technical progress in motor vehicles delivers a small expansionary improvement if the consumer price index is adjusted to account for the implicit price of private transport

So What If There Were a Larger and More Sustained Energy Efficiency Effort across the Economy, What Would be the Impact? Research Briefing 03

The real challenge of positive economic impacts is to those policy makers who are working hard to develop sustainable energy savings. As disposable household income is spent, additional energy is consumed as the economy seeks to meet increased demand for goods and services. Over time this can erode the initial absolute energy savings of the original initiative. Thus, a key challenge in the near term is to better understand this type of economic rebound effect and its impact on net energy savings. Improving our understanding of how people use this income released by lower energy bills will allow energy policy makers to better forecast net energy efficiency outcomes and to better accommodate economic growth, while retaining energy savings and carbon reductions

How Improving Household Efficiency Could Boost the Scottish Economy

While European governments continue to invest in energy efficiency as a key tool of energy and climate policy, there is increased interest in the broader economic benefits of energy efficiency in a social and economic context. Recent studies show that, beyond the direct effects on energy use and spending, multiple positive impacts of energy efficiency improvements exist in the wider economy as a whole. Gross Domestic Product (GDP) increases linked to household efficiency enhancements could well be an outcome of both implementing and realising energy efficiency measures. A team from the Centre for Energy Policy (CEP) and Fraser of Allander Institute (FAI) at the University of Strathclyde have used modelling and simulation to explore the economy wide impacts of energy efficiency improvements in households.1 A clear, long lasting stimulus to the economy is triggered by improving the energy efficiency of homes; this is because the disposable income of householders increases as a result of saving money on energy bills. The team used modelling to trace the economic impact of this disposable income increase. The simulation suggested that a spending-led GDP boost can be triggered and could have wider impacts in employment and public budgets. Associated with the increased economic activity will be an increase in energy use that tends to reduce the ultimate level of energy savings from an energy efficiency action. Such an effect is called “rebound”. However, by encouraging spending in low carbon products and services, the erosion of energy savings could be minimised

Can a reduction in fuel use result from an endogenous technical progress in motor vehicles? A partial and general equilibrium analysis

In this paper we employ a partial equilibrium approach to model private transport consumption as a household self-produced commodity formed by vehicle and fuel use. We show that under certain conditions vehicle-augmenting technical improvements can reduce fuel use. We then extend the analysis through Computable General Equilibrium simulations for the UK in order to investigate the wider implications of vehicle-augmenting efficiency improvements when prices and nominal income are endogenous. With a conventional macroeconomic approach, improvements in the efficiency of household consumption simply change the composition of household demand. However, when we adjust the consumer price index for changes in the price of private transport service (not observable via a market price), as advocated in Gordon (2016) there is an additional supply-side stimulus to competitiveness

Can private motor vehicle-augmenting technical progress reduce household and total fuel use?

This paper demonstrates the importance of modelling energy-intensive household services in general, and private transportation in particular, as combinations of energy and other inputs. Initially a partial equilibrium approach is used to analyse private transport consumption as a self-produced commodity formed by household vehicle and fuel use. We particularly focus on the impact of private vehicle-augmenting technical progress in this framework. We show that household fuel use will fall if it is easier to substitute between vehicles and fuel in the household production of private transport services than it is to substitute between private transport and the composite of all other goods in overall household consumption. The analysis is then extended, through Computable General Equilibrium simulation, to investigate the wider implications of similar efficiency improvements when intermediate demand, prices and nominal income are endogenous. The subsequent reduction in the price of private transport service (not observable in market prices) allows the wage measured relative to the CPI to rise whilst the wage relative to the price of foreign goods falls. This simultaneously increases UK international competitiveness, encouraging increased exports and reduced import penetration whilst allowing employment to rise. This provides an additional supply-side stimulus to production, employment and household income

Can private motor vehicle-augmenting technical progress reduce household and total fuel use?

This paper demonstrates the importance of modelling energy-intensive household services in general, and private transportation in particular, as combinations of energy and other inputs. Initially a partial equilibrium approach is used to analyse private transport consumption as a self-produced commodity formed by household vehicle and fuel use. We particularly focus on the impact of private vehicle-augmenting technical progress in this framework. We show that household fuel use will fall if it is easier to substitute between vehicles and fuel in the household production of private transport services than it is to substitute between private transport and the composite of all other goods in overall household consumption. The analysis is then extended, through Computable General Equilibrium simulation, to investigate the wider implications of similar efficiency improvements when intermediate demand, prices and nominal income are endogenous. The subsequent reduction in the price of private transport service (not observable in market prices) allows the wage measured relative to the CPI to rise whilst the wage relative to the price of foreign goods falls. This simultaneously increases UK international competitiveness, encouraging increased exports and reduced import penetration whilst allowing employment to rise. This provides an additional supply-side stimulus to production, employment and household income