Institute for Environmental Studies (IVM)
Water Economic Modeling for Policy Analysis:
A CGE approach to estimate the direct and indirect economic costs of water quality improvements in the
WFD
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)
Outline
Introduction WEMPA
AGE Model
Economy
Environment
Linkage
Data
Results (preliminary)
Potential and issues of the model
2
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:
–
–
–
–
–
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Institute for Environmental Studies (IVM), Vrije Universiteit
Agricultural Economic Research Institute (LEI)
Statistics Netherlands (CBS)
RIZA
WL Hydraulics
WEMPA Approach
Modular approach
Top-down modeling starting with economic model
4
WEMPA Modular approach
Economic
instruments
Economic
sector
models
General
Equilibrium
model
Emission
models
Up/down
scaling
model
Input load
models
WFD
(programs of
measures)
River basins
Rhine
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Meuse
Scheldt
Ems
Water quality
and ecological
models
WEMPA Approach
Modular approach
Top-down modeling starting with economic model
Use 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




Capital Labour Intermediates Abatement
Measures
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
Abatable
Emissions
Unabatable
Emissions
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
Subsidies
Budget Surplus
Tax
Government
Endowments
Subsidies
Budget Surplus
Rents
Tax
Consumption
Consumers
Endowments
Net Savings
Tax
Consumption
Tax
Market for Emission
Units
Emissions
Output
Market for Goods
and Factors
Producers
Input
Gross Investm.
Tax
Depreciation
Capital Use
Investor
Capital Sector
Capital Goods
Net investments
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Tax and Rent
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
–
–
–
–
–
–
–
–
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6.3 kg
217.4 kg
3.4 kg
3.2 kg
3.6 kg
0.3 kg
666.7 kg
55.6 kg
Arsenic
Chromium
Cadmium
Cupper
Mercury
Nickel
Lead
Zink
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
16000
14000
Million EUROs
12000
10000
8000
6000
4000
2000
0
0
50
100
150
200
Trillion C O 2 e quivale nts
15
250
300
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 emissions
Remark 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
Enhanced greenhouse effect, 2000
90
Sustainability
standard
16000
14000
Billion euros
Million EUROs
12000
10000
8000
6000
60
30
SNI 2
4000
2000
0
0
0
50
100
150
200
Trillion C O 2 e quivale nts
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250
300
0
50
100
150
Trillion CO2 equivalents
200
250
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)
Billion euros
Reduction of Net National Income (NNI)
due to emission norms derived form WFD
80
70
60
50
40
30
20
10
0
10%
20%
No changes of world market prices
20
50%
Changes of world market prices
Results (3) two scenarios for Variant II
Relative reduction in value added of industries:
scenarios comparison
Basic metal industry
Chemical industry
Rubber- en plastics industry
Transport by water
Paper and -board industry
Transport equipment industry
Textiles, clothing and leather industry
Non-commercial services
10% scenario
50% scenario
Elektrotechnical industry
Transport by land
0.0
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10.0
20.0
30.0
40.0
50.0
60.0
Results (4) direct vs. indirect costs (preliminary)
• “Direct costs” = Investments in abatement
technologies
• “Indirect costs” = Loss in Net National Income minus
investments
Variant I
Variant II
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Direct costs (billion €) Indirect costs (billion €) Share of
10%
20%
50%
10%
20%
50%
10%
2,32
2,36
2,41
3,24
6,07 23,44
42%
2,33
2,36
2,33
3,23
6,07
77,1
42%
direct costs
20%
50%
28%
9%
28%
3%
Results (5) Regional impact (NAMWARiB)
Example of the distribution of direct and indirect costs
across river basins for a 50% emission reduction scenario
Rhine-West 51%
Rhine-Centre 8%
Rhine-East 11%
Rhine-North 5%
Scheldt 2%
Meuse 20%
Ems 3%
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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/watereconomics
Thank
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you!