An analysis of the sensitivity of a dynamic climate-economy CGE model (GDynE) to empirically estimated energy-related elasticity parameters

A dynamic energy-economic CGE model is used to analyse how sensitive simulation results are to alternative values assumed by several types of elasticity of substitution. Substitutability in the energy mix is analysed by taking into account the nest structure of the CGE model in the energy module. Input substitutability in the production function is tested for the relationship between capital and energy in different manufacturing sectors. The simulation exercise reveals that the model produces highly differentiated results when different sets of elasticity parameters are adopted. A reduction in the flexibility of energy substitution possibilities makes abatement efforts more expensive at the general level. Moreover, this restriction generates changes in the distribution of costs associated with abatement efforts across regions. The direct implication derived from this work is that in order to use CGE forecasting models to predict the costs and feasibility of climate policies, they must be integrated with empirically estimated behavioural parameters at the highest possible disaggregation level.