Model concept, solver and details - ENV-Linkages
ENV-Linkages is fully homogeneous in prices and only relative prices matter. All prices are expressed relatively to the numéraire of the price system that is arbitrarily chosen as the export price index of high-income manufactured exports.
Market goods equilibria imply that, on the one side, the total production of any good or service is equal to the demand addressed to domestic producers plus exports; and, on the other side, that total demand is allocated, according to the Armington principle, between the demands (both final and intermediary) addressed to domestic producers and to import demand (see below).
All production in ENV-Linkages is assumed to operate under cost minimisation with an assumption of perfect markets and technologies that exhibit constant returns to scale.
Household consumption demand is the result of static maximization behaviour which is formally implemented as an “Extended Linear Expenditure System” (ELES).
In the standard macro closure:
- household savings is determined by the ELES demand system,
- government savings are fixed (in real terms) with the direct household tax schedule endogenous,
- foreign savings are fixed (with the real exchange rate adjusting to ex ante changes in the trade balance).
- Investment is savings determined.
The process of calibrating the ENV-Linkages model is broken down into three stages. First, a number of parameters are calibrated, given some elasticity values, to represent the data for historical year 2014 as an initial economic equilibrium. This process is referred to as the static calibration. Second, the 2004 equilibrium is updated to a reference year for the model baseline (currently 2019) by simulating the model dynamically to match historical trends over the period 2014-2019; static calibration is performed again for the reference year with price re-normalisation in order to express all variables in constant 2019 real USD. This step is important, as it ensures that the basis for the simulations is a relatively recent year. Third, the baseline projection for the model horizon 2019-2050 is based on conditional convergence assumptions about labour productivity and other socio-economic drivers (demographic trends, future trends in energy prices and energy efficiency improvements.
The baseline projection is then obtained by running the model dynamically over the period 2015-2050, keeping these key variables exogenous but letting the model parameters adjust endogenously. Thus, the model parameters are calibrated using the structural relations of the model (production functions, household preferences, etc.) to mimic the evolution of the key variables over time.
Dynamics involves three elements. Labor supply (by skill level) grows at an exogenously determined rate. The aggregate capital supply evolves according to the standard stock/flow motion equation, i.e. the capital stock at the beginning of each period is equal to the previous period's capital stock, less depreciation, plus the previous period's level of investment. The third element is technological change. The standard version of the model assumes labor augmenting technical changes - calibrated to given assumptions about GDP growth and inter-sectoral productivity differences. In policy simulations, technology is typically assumed to be fixed at the calibrated levels.
Reference scenario and counterfactual simulations
The Baseline scenario is carefully calibrated to offer a credible projection of economic activity by 2050 without ambitious climate action but including the impact of existing and stated policies. The Baseline calibration includes technological progress through various productivity parameters (e.g. autonomous energy efficiency improvements and labour productivity improvements). Particular attention is given to the calibration of the energy sector, including power generation and energy demand.
The baseline projection is then obtained by running the model dynamically over the period 2014-2050, keeping these key variables exogenous but letting the model parameters adjust endogenously. Thus, the model parameters are calibrated using the structural relations of the model (production functions, household preferences, etc.) to mimic the evolution of the key variables over time.
Several types of environmental policies can be simulated with ENV-Linkages. It should be emphasised that when the policy simulations are performed on this calibrated baseline, the model parameters are exogenously fixed, while the model variables are fully endogenous. In policy simulations, technology is typically assumed to be fixed at the calibrated levels. In most dynamic baseline or reference simulations, the growth rate of real per capita GDP will be exogenous and an economy-wide variable, for example a uniform labor productivity shifter, is endogenous and will serve as the instrument to target GDP growth. In policy or alternative simulations, the economy-wide factor would normally be exogenous and the growth rate of GDP would be endogenous.
Solution algorithm
ENV-Linkages model is written in the General Algebraic Modeling System (GAMS) modelling language. GAM is particularly useful for numerical modelling of linear, nonlinear and mixed integer optimization systems. The software has a number of solvers that can be used for a particular problem and, in many cases, switching between solvers is straightforward. In the past this has proved useful since problems that don’t solve with one solution algorithm may solve with another. For economic problems, GAMS can be particularly useful since it allows problems to be written as mixed complementarity – which specifies inequalities that the solution must meet. This facilitates the solutions to problems involving budgets constraints or homogeneous products being produced by multiple sectors.
History of ENV-Linkages model
The ENV-Linkages model is the successor to the OECD GREEN model, which was initially developed by the OECD Economics Department (Burniaux, et al. 1992) and is now hosted at the OECD Environment Directorate. GREEN was originally used for studying climate change mitigation policies (see Burniaux, 2000). It was developed into the Linkages model (Van der Mensbrugghe, 2005), and subsequently became the JOBS/Polestar modelling platform that was used to help underpin the first OECD Environmental Outlook (OECD, 2001). The JOBS model, though initially designed to assess labor market policies, incorporated various features of both the GREEN and RUNS models. As environmental issues continued to be a high priority at the OECD, the JOBS model was incorporated in the work program of the OECD Environment Directorate and it helped frame discussion and projections for the OECD Environmental Outlook. Over the last 20 years, the model has continued to evolve and is currently known as the ENV-Linkages model (see Chateau, Dellink, and Lanzi (2014) for a recent description of the model).
Note: The documentation of ENV-Linkages is 'in preparation' and is not yet 'published'!| Corresponding documentation | |
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| Previous versions | |
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| Model information | |
| Model link | |
| Institution | Organisation for Economic Co-operation and Development (OECD), France, https://www.oecd.org/. |
| Solution concept | General equilibrium (closed economy) |
| Solution method | Optimization |
| Anticipation | The ENV-Linkages model is a recursive dynamic neo-classical general equilibrium model, meaning that decision-makers do not know the future when making a decision today. After it solves each period, the model then uses the resulting state of the world, including the consequences of decisions made in that period - such as resource depletion, capital stock retirements and installations, and changes to the landscape - and then moves to the next time step and performs the same exercise. |