Energy Demand and GHG Mitigation Options

Abstract

This chapter presents an analysis of the conditions under which energy can be a lever of sustainable development for the N. Africa (The countries considered are: Algeria, Libya, Egypt, Morocco and Tunisia.) countries in the context of intensification of greenhouse gas abatement policies. The analysis begins with the identification of the distribution, uses and potential uses of the energy resources in the N. African countries. Then growth opportunities for N. African economies are examined in the context of an increasing intensity of climate policy and of a widening of its geographical scope providing opportunities for cross border integration of energy markets, for extension of emission permit markets and the use of JI and CDM development mechanisms (JI (Joint Implementation) and CDM (Clean Development Mechanism) are market instruments introduced in the Kyoto Protocol). In particular, alternative scenario simulations are used to analyze how the N. African countries may gain from incorporation into Europe’s greenhouse gas abatement effort. From a methodological point of view the analysis is performed by means of a computable general equilibrium model, named GEM-E3-Med, specifically constructed for the CIRCE project (CIRCE Integrated Project – Climate Change and Impact Research: the Mediterranean Environment. Supported by the European Commission’s Sixth Framework Programme, Sustainable Development, Global Change and Ecosystems). The analysis is quantitative and focuses on the effect of alternative scenarios on competitiveness, welfare, employment and economic growth of the Mediterranean economies and in particular the N. African countries.

Appendices

Annex

Table 14.27 GEM-E3-MED sectors/products

Table 14.28 GEM-E3-MED countries/regions

Table 14.29 GEM-E3-MED consumption by purpose categories

Appendix

1.1 Overview of the GEM-E3-MED Model

The GEM-E3-World model² (GEM-E3 2008) is a multi regional, multi-sectoral, recursive dynamic Computable General Equilibrium (CGE) model that incorporates all economic agents, an environmental module that includes permit trading markets for all GHG emissions, endogenous bilateral trade flows, discrete representation of power producing technologies and an imperfect labor market based on the efficiency wages approach (Shapiro and Stiglitz 1984). The regional and product coverage of the GEM-E3-MED model are presented in Annex (Tables 14.27, 14.28, and 14.29). The input output tables of the model are computed based on the GTAP v.7 dataset.³ A more analytic description of the model can be found in the E3MLab website.⁴

1.2 Firms’ Behavior

Domestic production is defined by branch and it is assumed that each branch produces a single product which is different from any other product in the economy. Production functions in the GEM-E3-MED are of the Constant Elasticity of Substitution (CES) type and exhibit a nested separability scheme, involving capital (K), labor (L), energy (E) and materials (M). The top level of the CES nest defines capital and Labor-Energy-Materials bundle input substitutability. Firms operate in a perfect competition environment and maximize their profits subject to their production function. The solution of the firms’ optimization problem consists of the optimal demands for each production factor. The derived demand and the unit cost functions determine the firms demand for production factors and its product supply.

1.3 Household

In the GEM-E3-MED model there is one representative household by region. Household behavior is derived through a two stage utility optimization problem. The consumer utility function is a LES (Linear Expenditure System – Stone (1954)) extended according to Lluch (1973) and has as arguments the consumption of goods, subsistence minima of consumption, leisure, and subsistence minima of leisure. In the first stage households decide on the allocation of their income M between consumption of goods and leisure. In the second stage the consumer should allocate its consumption over the different consumption goods. In GEM-E3-MED the consumption purposes (fn) are distinguished in durable goods (dg) and non durable goods (nd) where (fn:{dg,nd}) and the approach of Conrad and Schroder (1991) is followed.

1.4 Labor Market

General equilibrium models usually assume that no involuntary unemployment can exist and if wages were flexible enough the supply and demand for labor would balance at what is essentially considered to be full employment. Unemployment can be interpreted only as a voluntary choice of households for leisure. This situation clearly does not pertain to the North African countries and some modifications to the model had to be introduced in order to enhance its realism in this respect as well as a fuller analysis of the consequences of different policies. In the GEM-E3-Med model the efficiency wage approach is incorporated in order to represent involuntary (equilibrium) unemployment. Our approach is consistent with the efficiency wages theory of Shapiro and Stiglitz (1984) which states that productivity/quality of labor has a positive correlation with wages. The model has been calibrated to ILO statistics.

1.5 Investment

The demand for capital for the next year, which fixes the investment demand of firms, is determined through their optimal decision on factor inputs for the next year within the framework described above. The optimal long-run cost of derived capital is according to Ando- Modigliani formula (Ando et al. 1974). The comparison of the available stock of capital in the current year with the desired one determines the volume of investment decided by the firms. Since capital is fixed within each period, the investment decision of the firms affects their production frontier only in the next period. The investment demand of each branch is transformed into a demand by product, through fixed technical coefficients, derived from an investment matrix by product and ownership branch. This together with the government investments which are exogenous in GEM-E3-Med, constitute the total demand for investment goods.

1.6 Discrete Representation of Power Producing Technologies

The Input-Output tables represent the electricity sector as an aggregate of two activities: the power generation and the transmission and distribution of electricity. In the GEM-E3-Med model the electricity sector is split into different activities according to data from energy balances and company-related economic data about generation and transmission and distribution activities by country. It is assumed that power technologies produce electricity using a constant elasticity of substitution (CES) production function. The data are extracted from Eurostat, IEA and USA DOE statistics. Figure 14.10 shows the nesting scheme of the GEM-E3-Med model.

Fig. 14.10

GEM-E3-Med nested production function

Table 14.30 provides the statistics used for the calibration of the power generation technologies in 2005 for the N. African countries.

Table 14.30 Shares to total electricity generation (2005)

1.7 Trade

The Armington assumption is followed in GEM-E3-Med according to which demand for products (final or intermediate) is allocated between domestic products and imported products. In this specification, branches and sectors use a composite commodity which combines domestically produced and imported goods, which are considered as imperfect substitutes. Demand for imports is allocated across imported goods by country of origin. Bilateral trade flows are thus treated endogenously in GEM-E3-Med. The optimal demand for domestic and imported goods is obtained by employing the Shephard’s lemma. Import demand is allocated across region of origin using a CES functional form. The model ensures that the balance of trade matrix in value and the global Walras law are verified in all cases.

Fig. 14.11

Trade flows in the GEM-E3-Med model