Name: GreenREFORM Model
Type: CGE
Institution: Danish Research Institute for Economic Analysis and Modelling (DREAM)
Documentation: Relevant publications
Geographic coverage: Denmark
Description: The core of GreenREFORM is a dynamic CGE model with forward-looking behavior, overlapping generations, and frictions to achieve credible short-run dynamics. Production is divided into 52 sectors with 81 products and services, including 26 types of energy. Energy demand is categorized into six tax purposes, for accurate representation of marginal tax rates. Sub-models provide sectoral detail, and the abatement sub-model contributes a bottom-up representation of technological abatement options across sectors. All sub-models are solved simultaneously but can also be turned on and off at will.
Questions to be answered/variables considered: The model is aimed at evaluating the combined effects of economic and environmental policy within a unified framework. It provides information on emission accounts, land-use and livestock accounts, changes to return to capital and the value of firms in each sector, changes to the market price of agricultural land, macroeconomic impacts (including changes in production, employment, wage rates, private consumption, exports, imports, and investments), and detailed fiscal impacts (including derivate changes to, e.g., unemployment benefits and VAT revenues).
Strengths:
- The technical framework of GreenREFORM and full model integration is more efficient than iterating between a CGE and a system optimization model. Given a baseline, results for standard shocks can be generated in minutes and hence be used in political negotiations.
- GreenREFORM creates some functional overlap, and hence redundancy, with sector-specific models. However, this can be beneficial for building mutual understanding of complexities and bringing knowledge from sector experts into the macroeconomic decision-making environment.
Limitations:
- Supporting all sub-models with data and establishing the baseline requires a lot of information and strong support from sector experts and institutions.
Assumptions: Technology cost trajectories are exogenous, as Denmark is a small open economy.
Use: The Ministry of Finance used GreenREFORM as the centerpiece for analyzing combinations of taxes on agricultural emissions and government support schemes for, e.g., afforestation, food additives, and biochar, in support of the Expert Group on Green Tax Reform. The work of the expert group laid a solid foundation for informed political debate and paved the way for parliamentary agreement on a reform addressing agriculture and land use, land use change, and forestry (LULUCF) emissions in late 2024. The Danish Environmental Protection Agency uses the model to forecast waste generation and recycling as part of the Danish emissions inventory. Outside of government, GreenREFORM has been used to assess the importance of credible announcement of climate policy and the National Bank of Denmark has developed a method for assessing economic and financial risks associated with the transition based on simulations from GreenREFORM.
Development/lessons/challenges:
- The primary challenge was reformulating existing power market and energy system models into a continuous problem space for seamless integration with the macroeconomic model.
- One key to success has been the close collaboration between a dedicated model team, university researchers, sector experts, and end users. Getting various ministries engaged during development was challenging, highlighting the importance of top-down commitment and enforcement, planning, and stakeholder management when developing and introducing a new complicated tool across institutions.
- The model’s success relies on the high data quality in Denmark and the sophistication of other models already in use at DREAM, the MoF, and the Energy Agency. In countries where this is not a given, a lower level of ambition may be advisable while ensuring the core framework supports the level of ambition ultimately desired.
- The current focus is supporting model implementation in the MoF and other government agencies, with courses run to build capacity and agencies developing plans for making the best use of relevant sub-models.
- DREAM is engaged in a European Commission-sponsored Technical Support Instrument (TSI) program to develop a “work horse” version of GreenREFORM for institutions in four EU countries. The project also serves as a blueprint for other countries to build customized models.