Residential and commercial sectors - GEM-E3

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Model Documentation - GEM-E3

Corresponding documentation
Previous versions
Model information
Model link
Institution Institute of Communication And Computer Systems (ICCS), Greece,
Solution concept General equilibrium (closed economy)
Solution method Optimization

Demand per consumer category is decomposed into deliveries by sector of production in the consumption matrix. These matrices are usually reported in consumer’s prices, i.e. VAT and margins are included in the price of the delivery and moreover margins are not considered as a separate delivery by a service branch. In the GEM-E3 model, this matrix is transformed in producer’s prices.

To this end, the following procedure is applied:

• given the VAT rates for the different consumer categories, a consumption matrix without VAT is computed

• the margins included in the deliveries by branch are evaluated as the difference between the consumption matrix deliveries (without VAT) and the IO deliveries

• Margins are allocated between the services branches.

In the cases where consumption matrices are not available from statistical sources, they are computed through the following way:

• The consumption per consumer category is extracted from the National-Accounts (final consumption of households on the economic territory, by purpose) and corrected for the consumption by tourist,

• Given the VAT rates for the different consumer categories, the total consumption per category without VAT is computed,

• Total deliveries are taken from the Input-Output tables,

• Once the row and columns totals of the consumption matrix are computed for each country/region a RAS procedure is applied (the initial coefficients for the RAS are taken from countries with available consumption matrices).

Household consumption is decomposed into demand for specific consumption goods. This distinguishes between durable and non-durable goods. Households have to decide on the desired stock of the durable based not only on its relative purchase cost but also on the cost of those goods that are needed in connection with the durable (as for example fuels for cars or for heating systems). Energy is the main linked non-durable good. Energy complements the use of durables in order for them to provide a positive service flow. Consumption of energy does not affect the expenditure of durables through the change in preferences but rather through the additional burden in the user cost.

In the efficiency module developed for GEM-E3 model households and firms invest to improve efficiency of energy use which means that the economy substitute materials (equipment, insulation, etc.) and services (e.g. provided by technicians for installation) for energy. The amount of investment on energy saving technology is exogenous. It is assumed that the investment expenditure produce results one period after it takes place and continuously for a period of at least 20 years. The purpose of the investment concerns only the reduction of the unit consumption of energy in the sector or energy use of households, in which the investment takes place. That is, in the new setup agents use part of their income to acquire goods and services that are used to improve their energy efficiency. These goods and services accumulate to an energy saving capital stock that provides permanent energy efficiency improvements (with a declining/depreciation rate). The investment of a firm in energy saving equipment/capital increases energy efficiency and reduces its energy bill but it does not increase its productive capacity (i.e. it does not add to the capital stock of the firm). Energy efficiency improvement translates to additional demand for goods and services such as equipment goods, electrical goods, construction, market services (in fixed proportions).

Similarly for households the expenditures on goods and services to improve their energy efficiency do not increase directly their utility, only indirectly through the energy bill reductions. Hence, there are no direct effects on productive capacities or the consumption of other commodities. Of course, indirect effects do exist and are quantified through the model. Finally, it should be noted that the energy efficiency improvements are modeled so as to exhibit decreasing marginal returns (saturation effect).

To enforce the energy saving scheme to be implemented by firms and households the following methodology is adopted: The government raises an energy tax (proportional to the energy consumption of each economic agent). It imposes that rate of taxation to all consumers (firms and households) of energy, which is exactly necessary for collecting revenues equal to the amount of the energy saving expenditure. These revenues are then used by the government to finance the energy saving expenditures, ensuring public budget neutrality. Essentially the Government is used in the model to reallocate firms and households funds from their “optimum” placement in the reference case to the particular energy saving expenditures.

The introduction of energy efficiency cost curves into the GEM-E3 model involves three tasks:

• Specification of the energy efficiency cost curve

• Calibration of the curve

• Implementation within the current GEM-E3 model setup.