Modern CGE models capture real, financial, and environmental interlinkages in the economy and trace through the impact of various external shocks or policy interventions across a broad range of variables and over time, relative to an undisturbed business-as-usual baseline.
CGE models are useful for Ministries of Finance because measuring the general equilibrium effects of a policy (i.e., accounting for both direct and indirect impacts across all markets and actors in the economy) enables detailed fiscal analysis to be carried out at both a national level and a subnational level.
- CGE models are underpinned by large economy-wide datasets grounded in national accounting frameworks (e.g., supply-use tables or social accounting matrices). These work in combination with a rigorous theoretical specification that determines how variables move and respond to the policy shock or intervention under investigation.
- CGE models are detailed, in that they can simultaneously accommodate many industries, household income groups, labor skill or occupation groups, fiscal details (such as tax types), and regions within a country.
- Simulations to be run on a CGE model need to be described in terms of the set of exogenous shocks and the economic environment or assumptions under which the model is to be implemented. Assumptions about the economic environment are needed to solve CGE models, as the models contain many more variables than equations.
- Many CGE models allow different model closure specifications, which effectively describe the different policy implementation conditions and assumptions to be tested.
- To ensure CGE model results are informative, modelers and policymakers must work together to ensure policy shocks are introduced as intended, to ensure the assumptions imposed through the choice of model closure are fair and reflect the anticipated policy environment, and to build confidence that the results are relevant and credible.
In South Africa, CGE modeling played an important role in designing the carbon tax by providing an understanding of the policy’s expected real economic impacts, which reduced uncertainty and encouraged greater buy-in from stakeholders. Currently, it is being used to support the just energy transition, as it helps unpack structural shifts, short-term adjustment costs, and net macroeconomic impacts over time, which also helps analyze the regional and household-level impacts of the transition. In addition, CGE models are being used to analyze the revenue impacts of a large-scale transition to electric vehicles in the context of heavy petroleum taxation. The key institutional stakeholder for these research efforts is the National Treasury, in partnership with the Presidential Climate Committee (PCC) and the Development Bank of Southern Africa (DBSA).
Keywords
carbon pricingmacroeconomic indicatorsmodelspolicy simulationtransition
