GEM-E3,
a macroeconomic general equilibrium
model for studying Economy-EnergyEnvironment interactions
Workshop on transition to a low carbon
economy: status of the long run scientific
modelling in Belgium
Brussels, 22 March 2012
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GEM-E3 Versions
• GEM-E3 Europe, covering the 27 EU countries
(except Luxemburg, Malta and Cyprus)
• GEM-E3 World, covering the world economy (from 22 to
35 regions)
• GEM-E3 Belgium regionalised (three regions)
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General characteristics of GEM-E3
• follows the computable general equilibrium
methodology
• demand and supply functions derived from microeconomic
behaviour of economic agents (optimisation of their
objective)
• markets clear through prices and prices are such that at
equilibrium all agents optimise their behaviour
• covers the entire economic activity within a region
• simultaneously multinational and specific for each
region, markets clear at country, regional or World
level, where appropriate
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General characteristics of GEM-E3
cnt’d
• extensive environmental dimension, inclusive its
transfrontier characteristics and possibility of feedback
from the environment on the economy
• wide variety of policy instruments (standards, taxes,
permits, at World and regional level, different
allowance scheme)
• oriented towards medium & long term macroeconomic
implications of policies (general, energy, environment)
• follows a time forward path (dynamic recursive over
time) with myopic expectation
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Market Equilibrium
• Market clearing condition (equilibrium
between demand and supply) serves to
compute the market price (explicitly
computed)
• Goods markets: unit cost of production, under
perfect competition assumption
• Labour market: wage rate through equilibrium
(full flexibility) or wage rate rule (rigidity of
wage and possibility for unemployment)
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Market Equilibrium
(cnt’d)
• permit market through permit price (at sectoral,
national, regional or World level)
• at equilibrium, prices such that all agents
optimise their behaviour and fully use their
budget
• their final economic balance may be in
surplus or deficit
• model designed such that the sum of the
agents’ surplus or deficit are zero.
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Policy Appraisal
• Social Welfare Function
R
W
i 1
Wi
(1 )
(1  )
• where Wi represents the Region i welfare derived from
the consumer's utility function, which includes in a
separable way the utility from the consumption of goods
and leisure and the environmental utility/damage
• and  represents the degree of inequality aversion
• Such a function can incorporate two limiting
cases: the utilitarian approach and the Rawlsian
or democratic approach, through 
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Alternative versions
• Equilibrium mechanism for the labour market
(through wage flexibility or market negotiation/rigid
real wages)
• Depletable resource reduced form module (for oil and
gas)
• Endogenous growth: modelling endogenously
innovation and the impact of R&D expenditure
• Imperfect competition in goods and permit market,
allowing for the impact of market power
• Modelling the impact of climate change on the
economy
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Dimensions of the model
 22 World regions for the World model, one model per
region, all linked through trade flows
 5 countries for the EU model, one model per country, all
linked through trade flows
 4 economic agents: households, firms, government, rest
of the world.
 18 sectors: agriculture, 4 energy branches, 8 industrial
branches, 2 transport sectors, 3 market and non market
services
 13 household expenditure categories: 11 non durable
consumption categories, 2 durable consumption
categories.
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Dimension of the model (cnt’d)
 9 government revenue/expenditure categories: direct
and indirect taxes, energy and environmental taxes,
VAT, subsidies, import duties and foreign sector
transfers, social security taxes and transfers, public
consumption and government enterprises.
 10 air pollutants: CO2 and 5 other GHG, SO2, NOx,
VOC, PM and ozone, inclusive damage, abatement
possibilities and transfrontier aspects
 2 primary production factors: labour; capital.
 annual/5year time path: the model is solved
annually/by period and follows a time-forward path;
the model can run untill 2050 or even further.
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Sources and Types of Data
• Calibration data
• EUROSTAT for the EU model and GTAP Data for the world
version
• ExternE study/NEEDS FP6 project for damage from
pollution and its valuation
• Constructed: Investment matrix and Consumption matrix
• Elasticities from literature studies
• Exogenous data for simulations
• World growth and energy prices for EU model
• Technical progress on production factors
• Policy options for reference and scenarios
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Strengths of GEM-E3
• has a sound economic foundations
• ensures that in all scenarios the economic
system is in general equilibrium, oriented
towards medium to long term analysis: gives
the impact of policy when all the adjustment
have occurred
• insights in distributional effects between
countries and in longer term structural
mechanisms
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Strengths of GEM-E3
(cnt’d)
• macroeconomic, covers the different
dimension of the economy in a consistent
and rather detailed framework
• includes a great number of economy, energy
and environmental policy instruments
• allows to compute the overall cost of a
policy
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Limits of GEM-E3
• though rather detailed for a macroeconomic
model, remains still at an aggregate level,
no personal income distribution aspects
• simple behavioural and market clearing
assumptions, no modelling of barriors or
behavioural/organisational change
• no dynamic adjustment path, oriented
towards the medium/long term
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What questions can GEM-E3 answer?
• consistent general medium to long term
economic projections, inclusive their sectoral
disaggregation
• what are the overall implications of an energy/
environmental policy (on growth, employment,
trade balance, on environment, etc), how are
the cost distributed between EU countries
• integrated analysis of environmental and
energy objectives on an European scale, e.g.
energy security versus clean air
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What questions can GEM-E3 answer?
(cnt’d)
• integrated analysis of different environmental
problems: simultaneous analysis of global
warming and acid rain policy.
• which policy instrument/tax recycling strategy
to choose given an economy/
energy/environmental target and at which level
(EU or country, sectoral)
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Policy Studies with GEM-E3
• Impact of EU climate policies: contribution of
GEM-E3 to EU directives, to EU roadmaps,
evaluation of country pledges, … (by CES
KUL, IPTS, NTUA)
• Impact of the CAFE proposal
• Macroeconomic impact in the EU of climate
change (PESETA project)
• Generation of consistent projection of the
macroeconomic inputs for TIMES and TIAM
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