Substitution elasticities between capital, labour, material, electricity and fossil fuels in German producing and service sectors

In this paper, substitutional relationships between capital, labour, material, electricity, and fossil fuels in German producing and service sectors are estimated using a translog cost function. Estimates are based on a pooled time-series cross-sectional data sample for the period 1978-90 and nearly 50 sectors reported by the national account statistics. Results indicate that, except for the service sectors, own-price elasticities of all factor demands are below 0.5 (in absolute terms). In terms of the Morishima elasticity of substitution, labour and capital are substitutes in all sectors. Labour is generally a substitute for electricity, but not for fossil fuels. Results also support the hypothesis of capitalenergy substitutability and that the German economy is characterised by a nonhomothetic, non-constant-returns-to-scale production function. Substitution elasticities between input aggregates are estimated based on the nesting structure which underlies the computable general equilibrium model GEM-E3. Testing for weak homothetic separability restrictions, however, yields that input aggregation is allowed only in particular cases. Simulations with the GEM-E3 model demonstrate that the impacts of an ecological tax reform respond to a variation of substitution elasticities, but, all in all, the model proves to be relatively stable within a plausible range of values. --

Substitution Elasticities between Capital, Labour, Material, Electricity and Fossil Fuels in German Producing and Service Sectors

In this paper, substitutional relationships between capital, labour, material, electricity, and fossil fuels in German producing and service sectors are estimated using a translog cost function. Estimates are based on a pooled time-series cross-sectional data sample for the period 1978-90 and nearly 50 sectors reported by the national account statistics. Results indicate that, except for the service sectors, own-price elasticities of all factor demands are below 0.5 (in absolute terms). In terms of the Morishima elasticity of substitution, labour and capital are substitutes in all sectors. Labour is generally a substitute for electricity, but not for fossil fuels. Results also support the hypothesis of capitalenergy substitutability and that the German economy is characterised by a nonhomothetic, non-constant-returns-to-scale production function. Substitution elasticities between input aggregates are estimated based on the nesting structure which underlies the computable general equilibrium model GEM-E3. Testing for weak homothetic separability restrictions, however, yields that input aggregation is allowed only in particular cases. Simulations with the GEM-E3 model demonstrate that the impacts of an ecological tax reform respond to a variation of substitution elasticities, but, all in all, the model proves to be relatively stable within a plausible range of values

Climate change policy and burden sharing in the European Union: applying alternative equity rules to a CGE-framework

The objective of this paper is to present different equity rules that can be applied to the initial allocation of greenhouse gas entitlements and to analyse the potential impacts of these rules EU-wide as well as on the level of member states. The methodological framework used in the empirical part of the paper is based on the GEM-E3 model, a multi-country and multi-sectoral computable general equilibrium model for fourteen EU-member states. The major finding of the paper is that being ex ante favoured with respect to the initial allocation of permits might not hold ex post, i.e. when trade of permits and actual emission reductions are carried out. The reason can be found in two effects. First, the interdependence of the EU economies allows smaller economies not to make full use of the advantages they get through the ability-to-pay allocation: The negative impact on the economic perfomance of the big economies leads to a drop of export demand in the smaller economies, which in turn lowers the expected positive impact on welfare in the latter ones. Second, the way of how a surplus of permits in a particular country is used has considerable impacts on consumer welfare. Selling the surplus of permits on the international market and use the receipts to reduce public deficit is one way, but it has no direct impact on demand. Other, more demand stimulating recycling strategies of the surplus (e.g. a lump-sum transfer to households) might be more promising if welfare losses are to be minimzed. Both effects may outweigh the positive effect realized ex ante in some countries due to a more ?fair? initial allocation of permits. The outcome emphasizes the importance of a consideration of full general equilibrium effects across countries. --

Not Employed 37 Hours or Employed 41? A CGE Analysis for Germany

The objective of our analysis is to find out whether an increase in working time without pay compensation can be considered an adequate policy to reduce unemployment. From the perspective of economic theory the outcome is in general ambiguous: On the one hand, as the increase in working time raises labour productivity per employee, conditional demand for labour will increase (substitution effect) and conditional demand for intermediate inputs will decline. Since, on the other hand, workers do have a longer working time anyway, no positive effect on the number of persons employed can be expected. However, output of the manufacturing industry, and thus unconditional demand for labour, capital and intermediate goods, will increase (output effect). In order to sell the additional output, firms have to lower prices. Depending on the price elasticities, revenues and hence profits will change. We quantify the employment effects of an economy-wide increase in weekly normal hours in Germany on the basis of a CGE model using an input-output framework for all sectors of the economy. Our simulation results support the argument of the opponents of longer working time that not more jobs will be created. However, when we recycled the higher tax revenues from GDP growth to lower the contribution to social security, then we have been able to support the claim of the proponents that more jobs will be created. --unemployment,labour market rigidities,longer working hours,computable general equilibrium modelling

Modelling of foreign trade in applied general equilibrium models: theoretical approaches and sensitivity analysis with the GEM-E3 model

The specification of the world closure, i.e. the way of closing the domestic economy model by incorporating the external sector, is a crucial component for those models in which production and consumption is not specified endogenously for all countries. This paper looks explicitly at the assumptions concerning the trade behaviour of the rest of the world that can be found in literature and in empirical applications, such as the GEM-E3 General Equilibrium Model for the EU. Starting from a description of the closure rule in the actual GEM-E3 model version, two main changes in the foreign trade specification are proposed and tested using an EU-wide ecological tax reform scenario. The first change refers to the rest of the world?s export supply function in which a constant finite price elasticity is introduced. The second change concerns the rest of the world?s import demand function in which an activity variable is incorporated. In summary, the impact in terms of economic welfare and changes in macroeconomic variables is noteworthy for the former case while no substantial changes could be observed for the latter case. Additionally, the sensitivity of the GEM-E3 model to variations in key parameter values such as the upper-level Armington elasticity are analysed. Results indicate that the model can be interpreted as quite robust to parameter changes. --

Externe Kosten der Energieversorgung und ihre Bedeutung im Konzept einer dauerhaft-umweltgerechten Entwicklung

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Tradable SO-2-permits in the European Union: a practicable scheme for public utilities

In this paper, a practicable scheme of SO2-emission permits for European power producers is developed. Background is the second UN-ECE Sulphur Protocol from 1994 (Protocol of Oslo). After discussing some theoretical models of spatially differentiated permit schemes, evaluating the U.S. Acid Rain and RECLAIM Program, and considering the setting in the EU-15 countries, a scheme of locally undifferentiated emission permits is proposed which is distinguished by a high degree of both economic efficiency and market functioning. However, as our model simulations indicate, national deposition targets will be violated in all probability due to the scheme?s missing differentiation regarding the receptors. The risk of hot spots is addressed adequately by a differentiated bundle of countermeasures. The general economic impact of an EU-wide permit scheme is low, and, in terms of change in GDP, lower compared to a non-coordinated SO2 policy. The proposed mode of the initial permit allocation allows for early price signals and guarantees maximum static and dynamic efficiency. Balancing the interests of existing and new emitters, a long-term transition from the grandfathering to the free auction procedure is chosen. --

Modelling of Foreign Trade in Applied General Equilibrium Models: Theoretical Approaches and Sensitivity Analysis with the GEM-E3 Model

The specification of the world closure, i.e. the way of closing the domestic economy model by incorporating the external sector, is a crucial component for those models in which production and consumption is not specified endogenously for all countries. This paper looks explicitly at the assumptions concerning the trade behaviour of the rest of the world that can be found in literature and in empirical applications, such as the GEM-E3 General Equilibrium Model for the EU. Starting from a description of the closure rule in the actual GEM-E3 model version, two main changes in the foreign trade specification are proposed and tested using an EU-wide ecological tax reform scenario. The first change refers to the rest of the world's export supply function in which a constant finite price elasticity is introduced. The second change concerns the rest of the world's import demand function in which an activity variable is incorporated. In summary, the impact in terms of economic welfare and changes in macroeconomic variables is noteworthy for the former case while no substantial changes could be observed for the latter case. Additionally, the sensitivity of the GEM-E3 model to variations in key parameter values such as the upper-level Armington elasticity are analysed. Results indicate that the model can be interpreted as quite robust to parameter changes

Not Employed 37 Hours or Employed 41? : A CGE Analysis for Germany

The objective of our analysis is to find out whether an increase in working time without pay compensation can be considered an adequate policy to reduce unemployment. From the perspective of economic theory the outcome is in general ambiguous: On the one hand, as the increase in working time raises labour productivity per employee, conditional demand for labour will increase (substitution effect) and conditional demand for intermediate inputs will decline. Since, on the other hand, workers do have a longer working time anyway, no positive effect on the number of persons employed can be expected. However, output of the manufacturing industry, and thus unconditional demand for labour, capital and intermediate goods, will increase (output effect). In order to sell the additional output, firms have to lower prices. Depending on the price elasticities, revenues and hence profits will change. We quantify the employment effects of an economy-wide increase in weekly normal hours in Germany on the basis of a CGE model using an input-output framework for all sectors of the economy. Our simulation results support the argument of the opponents of longer working time that not more jobs will be created. However, when we recycled the higher tax revenues from GDP growth to lower the contribution to social security, then we have been able to support the claim of the proponents that more jobs will be created