Name: E3ME
Type: Macroeconometric
Institution: Cambridge Econometrics
Documentation: Webpage
Geographic coverage: Global
Description: E3ME’s structure is based on systems of national accounts with linkages to energy demand and environmental emissions. There are 33 sets of behavioral equations, parameterized using historical data, for household consumption, investment, international trade, prices, and energy demand. The model includes 71 global regions, including G20 and European Union Member States explicitly, 43 sectors, 28 categories of household expenditure (with more detail for Europe), 25 users, and 12 fuel types. The time-series model output runs through to 2050 on an annual basis. The model can be linked to Future Technology Transformation (FTT) sub-models, which currently exist for power generation, steel production, residential heating, and passenger car transportation sectors. These simulate the uptake of new technologies within sectors based on consumer demand, technology-specific costs, and market conditions such as regulation, financial support, and deployment rates.
Questions to be answered/variables considered: E3ME considers three areas of uncertainty related to “policy indecisiveness”: the rate of technology diffusion, macroeconomic impacts of low-carbon policies, and the scale and channels of energy-environment-economy interactions. Uncertainty around anticipation of policy outcomes is not modeled explicitly but can be explored via scenario and sensitivity analysis. The model can help with incentive design, based on within-country, -sector, and -group behavioral patterns.
Policy questions concern whether climate action is expensive for the economy; the extent to which a carbon price can reduce emissions; possible policy combinations including revenue recycling and price and income effects from switching from high-emissions to low-carbon technologies and their distribution across households, firms, and the government; identifying which sectors are likely to be exposed to restructuring and job reallocation and might therefore need government support; whether net zero can be reached without a specific technology; and how change in the technology mix affects the cost of and demand for energy, including distributional consequences.
Strengths:
- Innovation is explicitly represented in the model’s behavioral responses.
- The model is highly disaggregated and comprehensive.
Assumptions:
- Integrating uncertainty allows for factors such as involuntary employment.
- Investment is not constrained by savings, such that under some conditions energy and climate policies can be implemented without crowding out, which would dampen growth.
Use: The E3ME model has a web-based graphical user interface, and the model code and database are maintained by Cambridge Econometrics. The model is licensed to research institutions, government departments, and universities for public policy analysis. Active users include the South African Treasury, the World Bank, and the UN Economic Commission for Latin America and the Caribbean (ECLAC).
Development/lessons/challenges: Ongoing efforts are focused on improving understanding of E3ME’s approach and increasing accessibility for technically minded audiences. Further development includes expanding FTT submodels to more sectors, introducing new socioeconomic dimensions, including inequality and skills indicators, explicitly capturing non-financial obstacles such as skills shortages and finite material resources, and increasing the resolution of fiscal balances and the financial sector.