General equilibrium models for Norway and technological change

- some lessons learned

Taran Fæhn, SSB

Modellforum

CenSES OG CREE

24. oktober i 2013

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Background

TOP-DOWN models – CGE (SSB’s MSG6)

• Assume technologies of today (when calibrating) and of yesterday (when estimating)

• Disregard most opportunities for future technologies

BOTTOM-UP models – e.g. MARKAL/TIMES:

• Exogenous consumption and production patterns

• Disregard most reallocations and interactions among factor and output markets

Traditional approaches to abatement costs overestimate the costs of climate policies - potential abatement options are omitted

Complement each other Iteration of integration are possible solutions

Studies of climate policies in presence of technological change

Lessons from SSB analyses

A. Soft-linking MSG6 and MARKAL (Bjertnæs,Martinsen&Tsygankova 2013, Martinsen 2011)

B. Integrating technological information into MSG(-TECH) (Klimakur,2010; Fæhn&Jacobsen,2010)

C. Comparing MSG-TECH and bottom-up analyses (Fæhn,Gulbrandsen&Lindegaard,2010; Fæhn,Isaksen&Rosnes,2013)

D. Endogenising technological development (Bye&Jacobsen,2011; Heggedal&Jacobsen,2011)

E. Further plans

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A. Soft-linking MGS6 and MARKAL Bjertnæs,Martinsen&Tsygankova (EnEco 39/2013) Martinsen (EnPol 2011) Analysis Designs:

1) Shifted the climate policy (a uniform CO2 tax) in MARKAL

2) Made the same shift in MSG

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3a) Added onto MSG’s emission effects those from MARKAL– Total technology-induced emission reductions not dispersed on industries

4a) Also inserted annuities of investment and operation costs into MSG– Costs roughly allocated on industries based on emissions in the reference scenario

and added to the input costs

5a) Studied revenues and recycling in the MSG model with no iterations

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3b) Fed demand responses from MSG6 into MARKAL

4b) Re-simulated the tax shift in MARKAL-account for endo. demand

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A. Soft-linking MGS6 and MARKAL

Main lessons:•Planned to iterate all shifts, but retreated to two separate studies focussing on MSG and MARKAL, respectively (labour-consuming communication, solutions, many runs)

•A considerable job to match sectors and coherent reference states

•Overlapping endogeneity (e.g. different endogenous el.price mechanisms) -> iteration problems

Easier to use the inputs (before the model’s endogeneity) than

the outputs (after simulation) of MARKAL.

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Klimakur,2010 (macroeconomic computations)Research question:

Social abatement costs of meeting global, European and domestic emission caps within 2020 (Stortingets klimaforlik)

Analysis design:

1)Data on industry-specific technological options inserted in MSG-TECH for emission-intensive manufacturing, petroleum and road transport

2)MSG-TECH can endogenously determine what technology options are cost-effective for a given policy

Conclusions:

•Half of the abatement comes as investments in climate technologies

•The rest results from down-scaling and reallocation of resources to other activities

•The marginal abatement costs are relatively high (1500 kr/t)

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B. Integrating technological information into MSG(-TECH)

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R2 = 0,9696

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0 500 1000 1500 2000 2500 3000 3500

Marginal cost

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10 detailed projects, types:Electrification

Wind power installations

Power efficiency improvements

CCS

The MSG adjustments:

•Abatement curve= Relationship between accumulated abatement and marginal costs

•Total abatement = abatement in the traditional model+resulting from climate technology inv.

•Total abatement costs= integral above curve = added input costs in the industry (less efficient inputs)

The technological abatement curve

B. Integrating technological information into MSG(-TECH) illustration: Petroleum industry:

Fæhn og Jacobsen, 2010 (ØA5 /2010)Research question:Allowing for technological adaptations

The significance in terms of abatement costs

Analysis design:Same domestic cap in MSG6 and MSG-TECH

Conclusions:Marginal costs fall to 1/3 compared with those in a traditional CGE model when allowing for agents’ technology options (in manufacturing, petroleum and road transport).

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B. Integrating technological information into MSG(-TECH)

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Main lessons:•Able to place effects on real costs and emissions in the right industries

•BUT: costs are allocated on components (inputs) according to original input structure, i.e. only randomly a reasonable fit. Problem: wrong input market impact (eg electricity demand from electrification)

•Few “observations” in the estimations of abatement curves, particularly do we lack info on expensive techs - extrapolations

•The points rely on absolute potentials guessed by experts. How absolute are these? Actually cost-dependant?

•Continuous abatement curves -> Incremental abatement possible; putty-clay a better model for medium-term

•Information continuously develop

•Technology costs depend on time and policy regimes – learning (endo?)

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B. Integrating technological information into MSG(-TECH)

Fæhn,Gulbrandsen&Lindegaard,2010; (Smføk 5) Research question:

Klimakur 2020 approached the question of abatement costs in two different ways – bottom-up and macroeconomic analysis. Did the answers coincide?

Analysis design:

Systematic identification of the optimal abatement options in both approaches

Conclusions:

•The methods were partly complementary

•But also partly overlapping. Accounting for complements but not doublecounting overlaps left us with a Climate Cure 20-30% cheaper than the approaches separately found

•In addition: Many options were not included in any (e.g. agric) – and same with costs (e.g. transition) – down or up?

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C. Comparing MSG-TECH and bottom-up

Fæhn,Gulbrandsen&Lindegaard,2010;

Main lessons:•Hybrid modelling can reach even further - more technology options should be considered (binding carbon, energy efficiency in buildings)

•Problems: Many of the omitted options are more than free. Need to solve that puzzle (omitted costs?, market failures?, non-optimising agents?)

•More reallocations should also be considered (down-scaling of petroleum, agriculture, fishery – assumed unaffected now)

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C. Comparing MSG-TECH and bottom-up

Fæhn, Isaksen&Rosnes; 2013 (SSB Report 39) Research question:

What abatement will take place in Norway given a carbon price as in the 2 degree scenario

Process: Studying answers from MSG-TECH and MARKAL/TIMES(IEA,2013)

Reference=New policy scenario (current and expected policies)

Conclusion:

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C. Comparing MSG-TECH and bottom-up

Fæhn, Isaksen & Rosnes; 2013

Main lessons:•Other abatement measures than technological adaptations account for 1/3 in MSG-TECH. Nevertheless, abatement is far more costly and less is implemented in MSG-TECH than in MARKAL/TIMES

•MARKAL/TIMES considerably more technology-optimistic than MSG-TECHReasonable: -Cost (gu)esstimates in MSG-TECH are made for 2020, and used unchanged for later periods-IEA looks at a global (not unilateral) implementation, which will spur R&D and learning - and costreductionsBut:-Costs in IEA are lower than in many other studies of global implementation – also hybrid (NOU, 2012:16)

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C. Comparing MSG-TECH and bottom-up

Endogenising technological development (Bye&Jacobsen,2011; Heggedal&Jacobsen,2011)Until now presented modelling of diffusion – the costs are exogenous, but diffusion endogenous

Reasonable that technological development and cost reductions are endogenous in models of Norway?

– Adaptation has local aspects – costs fall through learning (internalised or external effects?)

– (Endogenous) absorptive capacity affect knowledge spillovers from abroad

– Norway performs endogenous R&D

We have modelled Norwegian R&D on CCS technologies og studied effects of public support and carbon pricing

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From MSG-TECH to SNoW modelStatistics Norway’s World model

Ambition: Make use of our lessons on hybrid modelling–Energy efficiency and market imperfections–More realistic factor market impacts–(Exogenous) technology development over time–Responsive output in petroleum, agriculture, fisheries–Dynamic (forward-looking) simulations (eg. Hyperbolic discounting)

CGE model family–World exogenous, MSG6-characteristics (SNoW-No) –World endogenous (global model)–SNoW-TECH (improved MSG-TECH characteristics)–Technological development (SNoW&ICE – Induced Change in Energy technologies)

SNoW-No under development–Why?–How?–How far have we got?

Summing up:• Success of soft-link solutions more likely if both models

operated by the same/closely collaborative teams

• Hybrid models have become common

• Norway has much expertise on climate technology details

• There exists an optimum for how detailed a hybrid model should be – suitable for macro-economic problems

• There is more potential in hybrid modelling – Energy efficiency, factor use, cost development over time….

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Takk for oppmerksomheten

tfn@ssb.no

REFERANSER:Bjertnæs Tsygankova&Martinsen, 2013 Energy Economics 39, 147-58

Bye&Jacobsen, 2011 Energy Economics 33/3, 543-55

Fæhn Gulbrandsen&Lindegaard, 2010 Samfunnsøkonomen 5, 4-15

Fæhn Isaksen& Rosnes, 2013 Rapporter 39, SSB

Fæhn&Jacobsen, 2010 Økonomiske analyser 5, 11-16

Heggedal&Jacobsen, 2011 Resource&EnergyEconomics 33/4,913-37

Klimakur2020, 2010 Rapport TA2590 KLIF (MDIR)

Martinsen, 2011 Energy Policy 39/6, 3327-36