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Macroeconomic Consistency issues in E3 Modeling: The Continued Fable of the Elephant and the Rabbit

Starting from a short presentation of the limits of using conventional production functions to hybridize energy-economy relationships, this paper presents a methodology aiming at a better integration of bottom-up policy scenarios in a top-down static general equilibrium framework. Along the lines of Ahmad�s innovation possibility curve, the methodology consists in implementing top-down envelopes of production and demand functions, whose variable point elasticities of substitution provide a flexible interface for calibration on any bottom-up expertise. Numerical experiments assessing the impact of a rising carbon tax on the global 2030 economy compare the application of this methodology to that of two standard CES-based approaches. Results confirm that, in case of large departures from reference scenarios or of strong convexities in bottom-up results, the use of conventional CES production and utility functions may lead to a significant bias in cost assessment.

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Energy Specializations: Energy Modeling – Other; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Environmental Market Design

JEL Codes:
C59 - Econometric Modeling: Other
Q54 - Climate; Natural Disasters and Their Management; Global Warming
Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

Keywords: E3 modeling, Energy economy models, Hybrid modeling, Bottom up, Top down

DOI: 10.5547/ISSN0195-6574-EJ-VolSI2006-NoSI2-3

Published in Hybrid Modeling, Special Issue #2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.