Macro-economy - REMIND-MAgPIE: Difference between revisions
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In contrast to the Negishi approach, which solves for a co-operative Pareto solution, the Nash approach solves for a non-cooperative Pareto solution. The cooperative solution internalizes interregional spillovers between regions by optimizing the global welfare by using Joint Maximization. The non-cooperative solution only considers spillovers, but they are not internalized. The relevant externalities are the technology learning effects in the energy sector. | In contrast to the Negishi approach, which solves for a co-operative Pareto solution, the Nash approach solves for a non-cooperative Pareto solution. The cooperative solution internalizes interregional spillovers between regions by optimizing the global welfare by using Joint Maximization. The non-cooperative solution only considers spillovers, but they are not internalized. The relevant externalities are the technology learning effects in the energy sector. | ||
==Trade== | ==Trade== | ||
Revision as of 13:17, 17 October 2016
| Corresponding documentation | |
|---|---|
| Previous versions | |
| Model information | |
| Model link | |
| Institution | Potsdam Institut für Klimafolgenforschung (PIK), Germany, https://www.pik-potsdam.de. |
| Solution concept | General equilibrium (closed economy)MAgPIE: partial equilibrium model of the agricultural sector; |
| Solution method | OptimizationMAgPIE: cost minimization; |
| Anticipation | |
Objective function
REMIND models each region r as a representative household with a utility function Ur that depends upon per-capita consumption
File:REMIND equation 3.2.1 1.JPG
where Crt is the consumption of region r at time t, and Prt is the population in region r at time t. The calculation of utility is subject to discounting; 3% is assumed for the pure rate of time preference r. The logarithmic relationship between per-capita consumption and regional utility implies an elasticity of marginal consumption of 1. Thus, in line with the Keynes-Ramsey rule, REMIND yields an endogenous interest rate in real terms of 5-6% for an economic growth rate of 2-3%. This is in line with the interest rates typically observed on capital markets.
In the Negishi approach, which computes a cooperative solution, the objective of the Joint Maximization Problem is given as the weighted sum of regional utilities that is maximized subject to all other constraints.
File:REMIND equation 3.2.1 2.JPG
An iterative algorithm adjusts the weights so as to equalize the intertemporal balance of payments of each region over the entire time horizon. This convergence criterion ensures that the Pareto-optimal solution of the model corresponds with the market equilibrium in the absence of non-internalized externalities. The algorithm is an inter-temporal extension of the original Negishi approach (Negishi 1972); see also (Manne and Rutherford 1994) for a discussion of the extension). Other models such as MERGE (Manne et al. 1995) and RICE (Nordhaus and Yang 1996) use this algorithm in a similar way.
The Nash solution concept, by contrast, arrives at the Pareto solution not by Joint Maximization, but by maximizing the regional welfare subject to regional constraints and international prices that are taken as exogenous dates by each region. The intertemporal balance of payments of each region is equal to zero and is one particular constraint that is imposed on each region. The equilibrium solution is found by iteratively adjusting the international prices until global demand and supply are balanced on each market. The choice of the solution concept is also important for the representation of trade, as discussed in Section Trade.
In contrast to the Negishi approach, which solves for a co-operative Pareto solution, the Nash approach solves for a non-cooperative Pareto solution. The cooperative solution internalizes interregional spillovers between regions by optimizing the global welfare by using Joint Maximization. The non-cooperative solution only considers spillovers, but they are not internalized. The relevant externalities are the technology learning effects in the energy sector.
Trade
REMIND considers the trade of coal, gas, oil, biomass, uranium, the composite good (aggregated output of the macro-economic system), and emissions permits (in the case of climate policy). It assumes that renewable energy sources (other than biomass) and secondary energy carriers are non-tradable across regions. As an exception, REMIND can consider bilateral trade in electricity between specific region pairs (e.g., Europe and North Africa / Middle East). According to energy statistics, trade in refined liquid fuels does take place in the real world, but to a smaller extent than crude oil. Since REMIND considers crude oil trade, the liquid fuel trade only has a small share and is attributed to crude oil trade. To be consistent with trade statistics, REMIND allocates the trade in petroleum products to crude oil trade.
For each good i a global trade balance equation ensures that markets are cleared:
REMIND models regional trade via a common pool, with the exception of the bilateral electrity trade mentioned above. While each region is an open system - meaning that it can import more than it exports - the global system is closed. The combination of regional budget constraints and international trade balances ensures that the sum of regional consumption, investments, and energy-system expenditures cannot be greater than the global total output in each period. In line with the classical Heckscher-Ohlin and Ricardian models (Heckscher et al. 1991), trade between regions is induced by differences in factor endowments and technologies. REMIND represents the additional possibility of inter-temporal trade. This means that for each region, the value of exports must balance the value of imports within the time horizon of the model. This is ensured by the inter-temporal budget constraint, where File:REMIND pi.JPG is the present value price of good i.
Therefore, discounting is implicit. Alternatively, this can be interpreted as capital trade or borrowing and lending. Inter-temporal trade and the capital mobility implied by trade in the composite good, cause mobile factor prices to equalize, thus providing the basis for an inter-temporal and inter-regional equilibrium. Since no capital market distortions are considered, the interest rates equalize across regions. Similarly, permit prices equalize across regions, unless their trade is restricted. By contrast, final energy prices and wages can differ across regions because these factors are immobile. Prices for traded primary energy carriers differ according to the transportation costs.
Trade balances imply that the regional current accounts (and their counterparts - capital accounts) have a sum of zero at each point in time. In other words, regions with a current account surplus balance regions with a current account deficit. Budget constraints inter-temporally balance debts and assets that accrue through trade. This means that an export surplus qualifies the exporting region for an import surplus (of the same present value) in the future, thus also implying a loss of consumption for the current period. REMIND models trading of emissions permits in a similar way. In the presence of a global carbon market, the initial allocation of emissions rights is determined by a burden-sharing rule wherein permits can be freely traded among world regions. A permit-constraint equation ensures that an emissions certificate covers each unit of GHG emissions.
The trading of resources is subject to trade costs. In terms of consumable generic goods, the representative households in REMIND are indifferent to domestic and foreign goods as well as foreign goods from different origins. This can potentially lead to a strong specialization pattern.
The treatment of trade in REMIND depends on the solution concept (Nash vs. Negishi). The two approaches are in a dual relationship. The Negishi approach considers the trade balances of all goods explicitly and adjusts the welfare weights in order to guarantee that the intertemporal balance of payments of each region is settled. REMIND derives the prices of traded goods from the optimal solution in each iteration. The Nash approach adjusts goods prices until demand and supply of traded goods are equalized. In each iteration, the international prices are exogenous parameters for all regions. Furthermore, each region is subject to an intertemporal budget constraint, i.e. the intertemporal balance of payments has to be equal to zero.
Table 3. Characterization of the treatment of trade in the two alternative Negishi and Nash solution concepts.
