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

Abstract:
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 AhmadÕs 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: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, Q54: Climate; Natural Disasters and Their Management; Global Warming, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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 bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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