To improve the modelling of the dynamics of innovation and investment in an applied general equilibrium model and to evaluate its impact for the design of energy and environmental policies. The endogenous process of innovation will be enhanced to cover a greater variety of processes and their pathways. A vintage approach for capital combined with a 'perfect foresight' dynamic framework will be introduced for a more correct evaluation of the transition costs and of the implications of time flexibility in policies in terms of cost/benefits. Alternative policy options for issues high on the agenda of the EU will be explored with the expanded model.
Description of Work:
On the modelling side, the dynamic framework of investment decisions will be developed; it focuses on the vintage of capital and on the intertemporal dimension. A vintage approach for capital, assuming putty-clay factor substitution will be implemented allowing a better representation of the substitution possibilities between production factors, of embodied and disembodied technical change and of the penetration of new technologies. For the intertemporal dimension of the model, a 'perfect foresight' dynamic framework will be implemented. It will allow measuring the transition costs (inter-sectoral adjustments and inter-regional) that can be significant relative to long-term gains, especially for energy and environment-related issues involving policy interference over longer time periods. Another aspect in model development concentrates on a further indigenisation of technical change. The question of biased versus neutral technical progress will be explored and the importance of disembodied technical change. For the electricity sector, for which an engineering representation of the production process is implemented, a more micro-economic approach will be explored. Learning curve relationships will be introduced in the model in order to better capture the dynamics of technical progress. At a more general level for the development of mutually coherent technologies, the impact of learning at a global level will be explored by modelling the choice of research projects. The uncertainty linked to the outcome of research projects will be taken into account. On the policy side, the project will explore what is the learning of these developments in terms of policy design by comparing the outcomes for a certain number of policies under the different specifications. Moreover, the model with the new specifications will be used to look at specific issues on the EU agenda (energy efficiency, renewable, climate change and R&D). Expected Results and Exploitation Plans: The GEM-E3 model has been frequently used in the past by the project partners for policy-oriented research activities. The new model developments will widen the scope for interesting issues and therefore the range of potentially interested organisations. The multi-purpose nature of GEM-E3 (national, EU-wide, world wide applications, endogenous innovation, alternative assumptions about expectations of agents, new instruments etc.) makes it an appropriate tool for the evaluation of policies in many domains, also outside energy and environment. The results of the project will be published in academic journals and presented at international and national workshops and conferences (including national and international organisations/authorities).
Funding SchemeCSC - Cost-sharing contracts
92295 Chatenay Malabry
6200 MD Maastricht