Water Economic Modeling for Policy Analysis:A CGE approach to estimate the direct and indirect economic costs of water quality improvements in the WFD

Institute for Environmental Studies (IVM)

Presentation for the International Workshop on User-Producer Conference: Water

Accounting for Integrated Water Resource Management, Voorburg, May 23, 2006

Vincent LINDERHOF (Institute for Environmental Studies, Vrije Universiteit)

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Outline

Introduction WEMPA AGE Model

Economy Environment Linkage

Data Results (preliminary) Potential and issues of the model

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Introduction WEMPA

• The ‘Directorate-General Water’ of the Ministry of Transport, Public Works and Water Management would like to have insight in direct and indirect economic costs of WFD measures.

• Donors: – ‘Directorate-General Water’ and – Leven met Water (Living with water)

• Participating organizations:– Institute for Environmental Studies (IVM), Vrije

Universiteit– Agricultural Economic Research Institute (LEI)– Statistics Netherlands (CBS)– RIZA– WL Hydraulics

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WEMPA Approach

Modular approachTop-down modeling starting with economic

model

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WEMPA Modular approach

GeneralEquilibrium

model

Economic sector models

Up/down scaling model

Water quality and ecological

models

Emissionmodels

Input loadmodels

River basins

WFD (programs of

measures)

Rhine Meuse Scheldt Ems

Economic instruments

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WEMPA Approach

Modular approachTop-down modeling starting with economic

modelUse of existing knowledge

– Models (AGE-SNI, DEAN from IVM, Substance flow model from RIZA/WL)

– Data (NAMWA and National Accounts from CBS, abatement technologies from experts)

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Model

• Integrated assessment model of IVM including the economy and physical flows.

• Static Applied General Equilibrium (AGE) Model for the Dutch economy– Measures instant costs and losses in Net

National Income – No technological changes over time

• Objective: maximization of Net National Income subjected to environmental constraints

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Model: economy

• Static AGE model with 27 production sectors (38 or even 58)

• Production structure: nested Constant Elasticity of Transformation/Substitution (CET/CES)

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Model: Nested CES structure

Output

Unabatable Emissions

Abatable Emissions

Abatement Measures

Intermediates Capital Labour

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Model: economy

• Static AGE model with 27 production sectors• Production structure: nested Constant

Elasticity of Transformation/Substitution (CET/CES)

• Three consumers: private households (luxury and subsistent consumption), government, the Rest of the World

• Consumption structure: price and income elasticities given

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Model: economy

• Environmental sectors– Abatement sector: demand and supply of

abatement technologies– Emissions and abatement enter production

functions as inputs– Emission permits: demand and supply of

emission permits given the total amount of emission permits based on the emission norms

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Model: Dutch economy in an AGE model

GovernmentEndowments

Consumption Emissions

Consumption OutputConsumers Producers

Endowments Input

Gross Investm. Depreciation

Capital UseInvestor Capital Sector Capital Goods

Net investments

Tax

Tax and Rent

Subsidies

Net Savings

Market for Goods and Factors

Market for Emission Units

Budget Surplus

Budget Surplus

Tax

Subsidies TaxRents

TaxTax

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Model: environment

• NAMWA data from Statistic Netherlands • Two physical flows (environmental themes)

– Eutrophication (NAMWA)• 10 kg N = 1 kg P = 1 Phosphor eq.

– Dispersion of toxic substances to water (NAMWA)• 1 Aquatic Eco-Toxicity Potentials (aetp equivalents)

equals – 6.3 kg Arsenic – 217.4 kg Chromium – 3.4 kg Cadmium– 3.2 kg Cupper– 3.6 kg Mercury– 0.3 kg Nickel– 666.7 kg Lead– 55.6 kg Zink

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Model: environment

• Input in model (NAMWA)– Emission intensity (per sector); – Abatement technologies (costs and reduction

potential from experts); – Emission standards (will be derived from water

quality standards)

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Example of abatement cost curves

Enhanced greenhouse effect, 2000

0

2000

4000

6000

8000

10000

12000

14000

16000

0 50 100 150 200 250 300

Trillion CO 2 equivalents

Mil

lio

n E

UR

Os

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Model: environment

• Input in model (NAMWA)– Emission intensity (per sector); – Abatement technologies (costs and reduction

potential from experts); • List of measures off which some are policy

scenario based

– Emission standards (will be derived from water quality standards)

• All environmental themes are equal to or are less than the emission norm imposed

• Interactions between environmental themes

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Model: environment

• Trade-off for meeting emission standards: – Investment in abatement technologies or– Costs of emission permits– If marginal costs > Marginal investment, then reduce

economic activities and consequently reduce emissionsRemark 1: if economic volume declines, the reduction

potential of abatement technologies declines as well!Remark 2: high intensity sectors are likely to invest first,

but this depends largely on the economic structure

• Emission permits scheme– Amount of permits are determined by the emission

norms– Revenues are recycled into the economy

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Example of Abatement technologies

Enhanced greenhouse effect, 2000

0

30

60

90

0 50 100 150 200 250

Trillion CO2 equivalents

Bil

lion

eu

ros

Sustainabilitystandard

SNI 2

Enhanced greenhouse effect, 2000

0

2000

4000

6000

8000

10000

12000

14000

16000

0 50 100 150 200 250 300

Trillion CO 2 equivalents

Mil

lio

n E

UR

Os

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Results (1)

• Three scenarios: 10%, 20% and 50% reduction of emissions: the exact emission norms derived from WFD are yet unknown

• Two variants– Variant I: No changes in relative world market

prices– Variant II: Changes in relative world market

prices

• Results are very preliminary

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Results (2)

Reduction of Net National Income (NNI)due to emission norms derived form WFD

0

10

20

30

40

50

60

70

80

10% 20% 50%

Bil

lion

eur

os

No changes of world market prices Changes of world market prices

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Results (3) two scenarios for Variant II

Relative reduction in value added of industries: scenarios comparison

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Transport by land

Elektrotechnical industry

Non-commercial services

Textiles, clothing and leather industry

Transport equipment industry

Paper and -board industry

Transport by water

Rubber- en plastics industry

Chemical industry

Basic metal industry

10% scenario

50% scenario

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Results (4) direct vs. indirect costs (preliminary)

• “Direct costs” = Investments in abatement technologies

• “Indirect costs” = Loss in Net National Income minus investments

10% 20% 50% 10% 20% 50% 10% 20% 50%Variant I 2,32 2,36 2,41 3,24 6,07 23,44 42% 28% 9%Variant II 2,33 2,36 2,33 3,23 6,07 77,1 42% 28% 3%

Direct costs (billion €) Indirect costs (billion €) Share of direct costs

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Results (5) Regional impact (NAMWARiB)

Rhine-West 51%

Rhine-Centre 8%

Rhine-East 11%

Rhine-North 5%

Scheldt 2%

Meuse 20%

Ems 3%

Example of the distribution of direct and indirect costs across river basins for a 50% emission reduction scenario

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Future improvements

• Dynamic model (DEAN)• Substances instead of environmental themes• Sector-specific but generic abatement

technologies• Regional distinctions but production sectors

(growth expectations)• Extension of priority substances, such as

POP’s, PCB’s and dioxines• No physical water flows

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Thank you!

• More information on our project Water economic mosdeling for Policy Analysis (WEMPA):

• http://www.ivm.falw.vu.nl/watereconomicsThank you!