Policy - GEM-E3

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Model Documentation - GEM-E3
Corresponding documentation
Model information
Institution Institute of Communication And Computer Systems (ICCS), Greece, .
Solution concept General equilibrium
Solution method The model is formulated as a simultaneous system of equations with an equal number of variables. The system is solved for each year following a time-forward path. The model uses the GAMS software and is written as a mixed non-linear complementarity problem solved by using the PATH algorithm using the standard solver options.
Anticipation Myopic

The GEM-E3 model has been extensively used by several DGs of the European Commission for policy analysis. Indicative works include those of Paroussos and Kouvaritakis (2003), Kouvaritakis et al. (2005) and Kouvaritakis and Paroussos (2006). GEM-E3 has also been used in a series of research projects funded by the European Commission like the MEDPRO and the AMPERE project. GEM-E3 is a general-purpose model that aims at coping with the specific orientation of the policy issues that are actually considered at the level of the European Commission. Policies are analysed as counterfactual dynamic scenarios and are compared against reference model runs. Policies are then evaluated through their impact on sectoral growth, finance, income distribution and global welfare.

The GEM-E3 model intends to cover the general subject of sustainable economic growth, and to support the study of related policy issues. Sustainable economic growth is considered to depend on combined environmental and energy strategies that will ensure stability of economic development. The general issue, to be analysed with GEM-E3, regards the conditions under which economic growth, and its distributional pattern, can be sustained in the presence of environmental constraints or energy shortages and even reinforced by means of an adequate technological and market-oriented policy.

The model intends, in particular, to analyse the global climate change issue a theme that embraces several aspects and interactions within the economy, energy and environment systems. To reduce greenhouse gas emissions it is necessary to achieve substantial gains in energy conservation and in efficiency in electricity generation, as well as to perform important fuel substitutions throughout the energy system, in favour of less carbon intensive energy forms.

Within the context of increasingly competitive markets, new policy issues arise. For example, it is necessary to give priority to market-oriented policy instruments, such as carbon taxes and pollution permits, and to consider market-driven structural changes, in order to maximise effectiveness and alleviate macroeconomic consequences. Re-structuring of economic sectors and re-location of industrial activities may be also induced by climate change policies. This may have further implications on income distribution, employment, public finance and the current account.

The model is designed to support the analysis of distributional effects that are considered in two senses: distribution among countries and distribution among social and economic groups within each country. The former issues involve changes in the allocation of capital, sectoral activity and trade and have implications on public finance and the current account of member states. The assessment of allocation efficiency of policy is often termed “burden sharing analysis”, which refers to the allocation of efforts (for example taxes), over different countries and economic agents. The analysis is important to adequately define and allocate compensating measures aiming at maximizing economic cohesion. Regarding both types of distributional effects, the model can also analyse and compare coordinated versus non coordinated policies in the European Union.

Technical progress and infrastructure can convey factor productivity improvement to overcome the limits towards sustainable development and social welfare. For example, European RTD strategy and the development of pan-European infrastructure are conceived to enable long-term possibilities of economic growth. The model is designed to support analysis of structural features of economic growth related to technology and evaluate the derived economic implications for competitiveness, employment and the environment.

The model puts emphasis on:

• The analysis of market instruments for energy-related environmental policy, such as taxes, subsidies, regulations, emission permits etc., at a degree of detail that is sufficient for national, sectoral and World-wide policy evaluation.

• The assessment of distributional consequences of programmes and policies, including social equity, employment and cohesion for less developed regions.

• The standard need of the European Commission to periodically produce detailed economic, energy and environment policy scenarios.