Name: Finance Canada Climate CGE model
Type: CGE
Institution: Finance Canada
Geographic coverage: Global
Description: The model has a nested production structure that allows substitution between energy types, energy efficiency improvements through substitution with capital inputs, and abatement possibilities to reduce processbased emissions.
Questions to be answered/variables considered: Model outputs include macroeconomic metrics such as regional GDP components, industry production and prices, government revenues and transfers, and detailed emissions accounting by source (including from intermediate and final use of fossil fuels and process emissions from production). The model has a full set of policy parameters to price emissions and has been used to discuss the relative efficiency of different potential climate mitigation proposals. Use cases include evaluating alternative designs of mitigation policies, a sensitivity analysis of climate mitigation policies under alternative demand or technology assumptions, exploring the interaction of multiple mitigation policies, and quantifying potential emissions impacts of non-climate policies. More generally, the model is used to explore the economic channels through which climate mitigation may impact the economy. Finance Canada does not rely on the model to project or predict the future economic or climate impacts of the Government’s mitigation policies.
Strengths:
- The model is useful for quickly examining the economic channels through which climate mitigation policies may impact the economy.
- It can be customized in a short amount of time, as it was intentionally developed and has limited complexity.
- It can be calibrated to a Global Trade Analysis Project (GTAP) aggregation or a baseline provided by Environment and Climate Change Canada (ECCC).
Limitations:
- The model has simplified dynamics, meaning it needs to be supplemented by other models for short-run analysis or the analysis of variables not directly included, such as inflation, interest rates, and government revenues.
- Parameterizing the model to capture real-world technological possibilities is highly challenging, in part because Finance Canada does not specialize in climate science or engineering. Hence, the model relies on external estimates for baseline emissions and most of the identifying assumptions that determine the ease of reducing emissions.
- The model results depend on parameter assumptions that can be challenging to verify and are subject to change.
Use: The Climate CGE model has been used to position internal Finance Canada assessments regarding climate mitigation policy over the past 20 years. The model is most useful for modeling the impacts of pricing policies, as these are directly reflected in the model. However, non-pricing measures can be incorporated via distortionary shadow prices and non-distortionary revenue return, given enough information about their direct impacts. Recently, the model has been used for sensitivity analysis on how alternative assumptions about future demand or technology may change how policies under development by ECCC will impact the economy.
Development/lessons: Improvements in and access to global datasets have arguably been the largest driver of model progress. Each release of GTAP provides an incremental improvement, with the release of GTAP-ENV and GTAP-POWER being particularly important for the climate variant. GTAP is useful more generally, as setting up a global social accounting matrix (SAM) is nontrivial. Thus, ensuring that the model can be calibrated to any GTAP aggregation has proven very beneficial. Going forward, peer reviewed data on available mitigation technologies by GTAP sector and region would be particularly useful.