Dec 2017 – Project reports, Project deliverables
[D 4.3 Working Paper on Macroeconomic Modelling]
Behavioural response to investment risks in energy efficiency - Working paper on macroeconomic modelling
Authors: Matthias Pfaff, Rainer Walz (Fraunhofer ISI)
In this paper, the macroeconomic effects of energy efficiency measures in households in the EU - 28 will be analysed. It is part of the project BRISKEE ( Behavioural Response to Investment Risks in Energy Efficiency). The BRISKEE project has the objectives of providi ng evidence - based input to energy efficiency policy - making by investigating the role of household decision - making on three levels:
- On the micro level, the project provides empirical evidence on the factors that influence investment decisions for energy efficiency technologies in households, in particular focusing on the role of household preferences for time discounting and risk, accounting for possible differences by technologies, household types, and countries.
- On the meso level, the project explores the impact of time discounting and risk preferences, and of policies affecting those factors on technology diffusion and energy demand in the residential sector in Europe up to 2030. The project uses inputs from the micro - level analysis in order to improve the representation of investment decisions in energy demand modelling tools.
- On the macro level, BRISKEE explores the long - term macroeconomic impacts of changes in micro - economic decision - making and of energy efficiency policy on employment and GDP in the EU up to 2030. The macroecono mic modelling uses in put from the scenarios generated in the energy demand models.
Energy efficiency is one of the main pillars of European climate and energy policy (European Commission 2010, 2011c, 2011d, 2011b, 2011a). Improving energy efficiency can also deliver a range of economic benefits to the European society (OOECD//IIEA 2012). Next to individual - level and sectoral benefits, such as increases in household incomes and the competitiveness of companies, on the macroeconomic level energy efficiency may have desirable effects on GDP, employment, trade balances, and security of energy supply.
Energy efficiency has been widely studied on the micro level, whereas only a small number of studies have analysed the macroeconomic impacts of energy efficiency. The IEA (22014) provides a good overview of the multiple levels on which energy efficiency can have an impact. On the macro level, Integrated Assessment Models (IIAMs) are often used to capture the multiple macroeconomic mechanisms unfolding in the wake of energy efficiency measures. Pollitt et al. (22016), using the macro - econometric E3ME model, expect overall positive impacts on GDP and employment in Europe, whereas a considerable negative impact is predicted upon extraction utilities and EU Member States where this sector has a high share. In a global study on measure s to close the 2020 emissions gap, Barker et al.. (22015) find positive impacts of energy efficiency on GDP with a global increase of 0.5 % by 2020 and a reduction of unemployment and the creation of 6 million net jobs by then. Turner (22009), using a Computable General Equilibrium (CCGE)) model, finds positive GDP and employment effects of energy efficiency in the UK. However, she analyses a case in which the energy efficiency improvement is exogenous and costless. Also concentrating on the UK economy and using the MDM - E3 model, Barker et al. (22007) find a positive development for GDP and employment until 2010 under energy efficiency policies.
Other reports do not base their studies on complex models but us e other quantitative or qualitative methods for the evaluation of the macroeconomic impacts of energy efficiency. Mirasgedis et al. (22014) evaluate the impact of energy efficiency policies on the Greek building and construction sector and find evidence for significant employment benefits. However, they do not use a dynamic macroeconomic model, but a static Input - Output Model. Furthermore, even though they account for positive benefits of energy cost savings reallocated to other consumer goods after the initial investment phase, they do not tackle the impacts which might happen during the investment phase if energy cost reductions are not high enough to compensate for investment outlays. Saunders (2013) focuses on the fuel//GGDP ratio by using a top - down theoretical macroeconomic model of a neoclassical growth variety to find the qualitative conclusion that the increase in GDP due to a reduction in fuel consumption is most likely small. Croucher (2012) studies the impact of energy efficiency standards for the Southwestern States of America by using a qualitative method and discussing how these may be incorrectly estimated or even completely ignored within the literature. He finds evidence that by trend the economic effect of energy efficiency is over - estimated: Energy efficiency standards tend to create jobs in relatively low - paid sectors (e.g. retail and service sector) which comes at the cost of a reduction of employment in higher paid job sectors (e.g. utility sector). A review by the OECD//IIEA (22012)) comes to the conclusion that regarding the creation of jobs with a short lead time, energy efficiency has significant potential. Net improvement in this case can be traced back to energy efficiency programs through direct job creation on the one hand and indirectly through consumer surplus spending. A reduced unemployment rate can additionally be beneficial for the national budget.
Previous meta - analysis of growth and employment effects of energy policies have shown that various factors are important to interpret results (see Walz and Schleich 2009). Among the most important ones are the level of no - regret - potentials, which drive down net costs for the economy, the assumptions about capital markets and mac roeconomic situations, which influence the level of crowding out effects of investments, and the composition of the economy analysed, especially whether or not investment goods and energy is produced domestically or imported. Furthermore, policy instrument s play an important role, especially if the energy policy is accompanied by a green tax reform, which lowers labour cost simultaneously to reduced energy consumption, and provides for a substitution towards higher labour input. Finally, modelling characteristics play a role, e.g. the difference in results of CGE models compared to Keynesian econometric models. All this leads to the conclusion that there is still uncertainty with regard to the outcome of energy efficiency improvement. Clearly, the results quoted above cannot be transferred directly to the changes in energy efficiency, which are analysed within the BRISKEE project.
The paper is structured as follows. Section 2 presents the methodological approach used for modelling the macroeconomic effects of energy efficiency improvements. Section 3 summarizes the macroeconomic impulses generated from the energy demand projections of the energy demand models Invert//EEE - Lab and FORECAST. The results of the macroeconomic analysis are presented in chapter 4, which closes with a discussion and interpretation of the results.