The economic impact of Green Certificate market through the Macro Multiplier

approach

M. Ciaschini, R. Pretaroli, F. Severini, C. Socci

WIOD Conference, Wien – 26th 28th May, 2010

University of Macerata

Which is the convenient composition of the policy control for the energy balance target?

Policy on Renewable Energy affects

the ratio between renewable energy output and total energy output, RNR energy ratio

and the output and the value added

Aim of the paper

WIOD Conference, Wien – 26th 28th May, 2010

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

Which is the convenient composition of the policy control for the energy balance target?

Outline

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

The Italian Green Certificate scheme

MethodologyInput-Output Table and the Energy balance (ISTAT)Hybrid Input-Output modelMacro Multiplier approach

Simulations and Findings

Which is the convenient composition of the policy control for the energy balance target?

The Italian Green Certificate scheme

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

all suppliers or distributors of electricity are compelled to produce a quota of renewable electricity if they lay on the network more than 100 GWh year

the quota = 2% of the excess in total production of electricity

the Italian Authority for the Energy Services (ESM) emits the certificates which represent the green quality of each unit of renewable electricity generation.

Which is the convenient composition of the policy control for the energy balance target?

Methodology: the Data Base

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

I-O Table for the Italian economy for the year 2005 (59x59 commodities) (ISTAT, 2007)

direct requirement of Renewable Energy (Energy balance, ISTAT, 2007)

1Products of agriculture, hunting and related 31Secondary raw materials2Products of forestry, logging and related 32Electrical energy3Fish and other fishing products; 33Collected and purified water4Coal and lignite; peat 34Construction work5Crude petroleum and natural gas; 35Trade, maintenance and repair services 6Uranium and thorium ores 36Wholesale trade and commission trade services7Metal ores 37Retail trade services8Other mining and quarrying products 38Hotel and restaurant services9Food products and beverages 39Land transport; transport via pipeline services

10Tobacco products 40Water transport services11Textiles 41Air transport services12Wearing apparel; furs 42Supporting and auxiliary transport services13Leather and leather products 43Post and telecommunication services14Wood and products of wood 44Financial intermediation services15Pulp, paper and paper products 45Insurance and pension funding services16Printed matter and recorded media 46Services auxiliary to financial intermediation17Coke, refined petroleum products and nuclear fuels 47Real estate services18Chemicals, chemical products 48Renting services of machinery and equipment 19Rubber and plastic products 49Computer and related services20Other non-metallic mineral products 50Research and development services21Basic metals 51Other business services22Fabricated metal products, except machinery 52Public administration and defence services23Machinery and equipment n.e.c. 53Education services24Office machinery and computers 54Health and social work services25Electrical machinery and apparatus n.e.c. 55Sewage and refuse disposal services, sanitation 26Radio, television and communication equipment 56Membership organisation services n.e.c.27Medical, precision and optical instruments 57Recreational, cultural and sporting services28Motor vehicles, trailers and semi-trailers 58Other services29Other transport equipment 59Private households with employed persons30Furniture; other manufactured goods n.e.c. 60Renewable energy

Commodities classification

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

Which is the convenient composition of the policy control for the energy balance target?

Methodology: the Hybrid Input-Output model

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

GWh

GWhGWhGWh

€

€

€

€

ˆ1*** xBA

*1** fAIx

kj

ij

b

bB*

k

i

f

ff *

k

i

x

xx*

Which is the convenient composition of the policy control for the energy balance target?

MethodologyMM approach for the Leontief reduced form

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

1* *AIR

0111 12 1

021 22 2 2

01 2

. .

. .

. . . . . .

. . . . . .

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m

m

m m mm m

fr r r

r r r f

r r r f

xTPMZR *

Policy control structures

Macro MultipliersPolicy target structures

Singular Value Decomposition

Methodology: the Hybrid Input-Output model

m1 m2 m3 m4 m5 m6

Policy controlPolicy target Macro MultipliersKey structuresKey structures

z41

z42

z43

z44

z45

z46

z11

z12

z13

z14

z15

z16

Z1

z51

z52

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z55

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z61

z62

z63

z64

z65

z66

z31

z32

z33

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z35

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z21

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z23

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z6

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p41

p42

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p45

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p11

p12

p13

p14

p15

p16

P1

p51

p52

p53

p54

p55

p56

p61

P62

p63

p6

p65

p66

p31

p32

p33

p34

p35

p36

p21

p22

p23

p24

p25

p26

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p1

p2

p3

p4

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p6

p =

z1

z2

z3

z4

z5

z6

= z

Which is the convenient composition of the policy control for the energy balance target?

TPMZ

Macro Multiplier approach

Which is the convenient composition of the policy control for the energy balance target?

Simulations and results

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

1st scenario:We adopt the structure of the observed final demand in the I-O table

We impose a shock on final demand of 1,686 million of €

1st scenario Final Demand

I-O structure (f) structure 1 (p1) structure 51 (p51)

  Δf * = 1,686 ml € Δf1* = 0.10% Δf51

* = 0.10%

Multiplier 1.874 2.005 1.514

RNR energy ratio 16.89% 16.92% 17.05%

Green Certificate variation 1.35% 3.32% 11.72%

Value added variation 0.10% 0.63% -0.03%

Which is the convenient composition of the policy control for the energy balance target?

Policy targetz1

Policy targetz51

Which is the convenient composition of the policy control for the energy balance target?

Simulations and results

WIOD Conference, Wien – 26th 28th May, 2010 University of Macerata

2st scenario:We adopt the 1st key control structure since we aim to achieve the

maximum effect on output and value added

We impose a shock on final demand of 1,686 million of €

3st scenario:We adopt the 51st key control structure since we aim to achieve the

environmental target without neglecting output change

scenario

1st 2st 3st

I-O structure (f)Key structure 1

(p1)Key structure 51

(p51)

  Δf * = 1,686 ml € Δf1* = 1,686 ml € Δf51

* = 1,686 ml €

Multiplier 1.874 2.005 1.514

RNR energy ratio 16.89% 16.92% 17.05%

Green Certificate variation 1.35% 3.32% 11.72%

Value added variation 0.10% 0.63% -0.03%

Impacts on output according the I-O structure

60 GWhof

Renewable Energy

Which is the convenient composition of the policy control for the energy balance target?

147 Gwhof

Renewable Energy

Impacts of the final demand change according to the 1th policy control structure

Which is the convenient composition of the policy control for the energy balance target?

518 Gwhof

Renewable Energy

Impacts of the final demand change according to the 51th policy control structure

Structure 51 is the convenient composition of the policy control

for the energy balance target

The economic impact of Green Certificate market through the Macro Multiplier

approachM. Ciaschini, R. Pretaroli, F. Severini, C. Socci

Thank you

WIOD Conference, Wien – 26th 28th May, 2010

University of Macerata

Final demandEndogenous

total output

Policy target Policy controlR*

p1

p2

p3

p4

p5

p6

z1

z2

z3

z4

z5

z6

pz

_____ _____

??Sum of the macrovariable’s elements

Sum of the absolute valuesof the variable’s elements

[Mannhattan Norm]

Square root of the sum of the squaresof the variable’s elements

[Euclidean Norm]

ι

ιpi

iz

i

iz

i

2iz

i

ip

i

2ip

Variable’s balance

Variable’s change

Variable’s modulus

TPMZR *

Differences between the I-O and the 1th composition

Gwh

Final Demand

I-O structure (f) structure 1 (p1) structure 51 (p51)

  Δf * = 0.10% Δf1* = 0.10% Δf51

* = 0.10%

Multiplier 1.874 2.005 1.514

RNR ratio 16.89% 16.92% 17.05%

Green Certificate variation 1.35% 3.32% 11.72%

Value added variation 0.10% 0.63% -0.03%

Aggregate results

Commento slide 1

The economic impact of the Green Certificate market through the Macro Multiplier approach

There is economic opportunity of complying with the environmental target on Renewable Energy Sources because there is positive interaction between policy on Renewable Energy Sources and output change.

There is a large number of economic assessments to determine the costs or the benefits of taking actions to address climate change.

The analysis we propose on Green Certificate Market is, then, based on the determination and use of what we called the Macro Multipliers.

The Macro Multiplier analysis:

1) Examines the role played by the order of magnitude of a macroeconomic variable, the SCALE, and the role of its inner composition, the STRUCTURE.

2) Is performed on bothon the traditional Leontief model

on the model emerging from “extended” multisectoral circular flow of income as provided by the National Accounting Matrix or by the Social Accounting Matrix

1) We will make reference to the essentials of National Accounting to see how the interaction between the multisectoral features of the main macro economic variables are dealt with in what we need to consider our “observation system”

2) We will then show how both the traditional Leontief model, which is more tied to the production loop of the economy, and an extended multisectoral model, that integrates the production aspects with the primary and secondary distribution of incomes can emerge.

3) Then we discuss the reduced forms of these models as the tool of policy modelling.

4) Finally with some mathematical manipulations we will complete the analysis establishing “convenient” ways for quantifying macro economic variables in terms of their scale and their structure.

MI SERVE

The analysis aims to give consistent recommendations that could be used in order to design integrated policies both with environmental and economic aims

- Interaction between policy on Renewable Energy Sourcesand output change

- There is economic opportunity of complying with the European target on RES

The Italian Green Certificates scheme (GC).

TP~

M Z~p0 0p~

0p̂ 0z0pPT~

0pPM T~

0pZˆ~

Rz0

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ROTATION MULTIPLICATION COUNTER ROTATION

TRANSFORMATION OF THE POLICY VECTOR INTO THE TARGET VECTOR

p2

Second policy component

p1

First policy component

STEP ONE: POLICY CONTROL EVALUATION IN TERMS OF THE POLICY–CONTROL KEY- STRUCTURES

0p~

First policy-control key structure

1p~Second policy-control

key structure

2p~

STEP TWO: AGGREGATE MULTIPLICATION OF THE ACTUAL POLICY CONTROL ALONG EACH POLICY-CONTROL KEY STRUCTURE

m1

First Macro M

ultiplier m2

Second M M

STEP THREE: POLICY-TARGET RECOMPOSITION THROUGH THE POLICY TARGET KEY STRUCTURES

First Policy-target key structure

1z~

Second policy-target key structure

2z~z1

z2

p

First target component

Second target component

The Policy Isoquants

Modulus-Isoquant Absolute change–Isoquants

Policy Control Policy Target

Modulus- Isoquants and isocostsChange- Isoquants and isocosts

Leontief Multipliers

0111 12 1

021 22 2 2

01 2

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m

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fr r r

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r r r f

x

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v2s2u2

v3s3u3

f(1)

f(1)

f(1)

f(1)

f(1)

a1 = v1f(1)

u1b1

0 = v2f(1)

0 = v3f(1)

b1 =s1a1

x = u1b1u1b1

x = u1s1a1v1f(1)

= a1v1’

V1’

f1

x=b1u1

x2

x1 f(1)=a1v1

’f2

u1

Endogenous policy 1

Commento alla metodologia!!!!!!!!!!!!!!!

Data BaseI-O Table for the italian economy for the year 2005 (59x59 commodities) (ISTAT, 2007)Direct requirement of Renewable Energy (Energy balance, ISTAT, 2007)

Hybrid Input-Output model

Energy commodity is characterized by non unitary pricings

Macro Multiplier approach

Allows to identify the key structure of the exogenous variable

Policies can be designed in monetary and physical terms