Exogenous specification of technological change in socioeconomic systems Essay

Chapter 5

Models of complex socio-economic systems require simplifying premises on system boundaries and system relationships. They operate under the premise that the implicit in economic construction will stay unchanged, or else it will alter in a specified manner.

Technological alteration can be integrated to economic theoretical accounts of clime alteration as it relates to this premise. There are two wide attacks for patterning the interaction between energy, the environment and the economic system. They differ chiefly with regard to the accent placed on a elaborate, technologically based intervention of the energy system, and a theoretically consistent description of the general economic system. The theoretical accounts puting accent on the former are strictly partial theoretical accounts of the energy sector, missing interaction with the remainder of the economic system. In general, they are bottom-up engineering-based additive activity theoretical accounts with a big figure of energy engineerings to capture permutation of energy bearers on the primary and concluding energy degree, procedure permutation, procedure betterments ( gross efficiency betterment, emanation decrease ) , or energy nest eggs. They are largely used to calculate the least-cost method of run intoing a given demand for concluding energy or energy services subject to assorted system restraints such as exogenic emanation decrease marks. Bottom-up theoretical accounts embed new engineerings and pattern the incursion of these engineerings based on costs and public presentation features.

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Technological alteration occurs as one engineering is substituted by another.The theoretical accounts stressing the above-named description of the general economic system are general economic theoretical accounts with lone fundamental intervention of the energy system. Using the top-down attack, they describe the energy system ( similar to the other sectors ) in a extremely aggregative manner by agencies of neoclassical production maps that gaining control permutation possibilities through permutation snaps. They normally do non trust on direct descriptions of engineerings.

Technological alteration, instead, alters the costs of production at a trade good or industry degree. Top-down theoretical accounts may be classified as unfastened ( demand driven Keynesian ) or closed ( general equilibrium ) theoretical accounts ( for a theoretical account categorization see e.g. ( Weyant, 1999 ) ) . Macroeconometric theoretical accounts are based on long-term clip series informations.

They consist of econometrically estimated equations without equilibrium premises. Macroeconometric theoretical accounts offer a batch of economic item, but small structural item. Because of their structural characteristics, they are particularly suited for short-term or medium-run rating and prediction. Computable general equilibrium ( CGE ) theoretical accounts have become the standard tool for the analysis of the economy-wide impact of nursery gas suspension policies on resource allotment and the associated deductions for incomes of economic agents ( Grubb, 1993 ) . They are well-known Arrow-Debreu theoretical accounts that concern the interaction of consumers and manufacturers in markets.

The family penchants every bit good as the production of trade goods are normally captured by nested changeless snap of permutation ( CES ) maps. General equilibrium provides a consistent model for analyzing price-dependent interactions between the energy system and the remainder of the economic system. This is of import, since C suspension policies non merely do direct accommodations on fossil fuel markets ; they besides produce indirect spillovers to other markets which in bend feed back to the economic system ( Bohringer, 2002a ) . There are besides assorted mixes of these wide types. Sometimes a top-down representation of the economic system is linked with a bottom-up description of engineerings in energy markets. A synthesis of bottom-up and top-down mold with a direct engineering description in the energy sectors and top-down regular functional signifiers in the other production sectors is presented by ( Bohringer, 1998 ) .


Exogenous specification of technological alteration

Basically all theoretical accounts of clime alteration agree with ( Solow, 1956 ) in presuming an exogenic overall productiveness growing of about 2-3 per centum per twelvemonth ( Azar, 1999 ) . In add-on, exogenic technological alteration can be introduced to any economic theoretical account of clime alteration by an independent energy efficiency ( AEEI ) parametric quantity or by premises about future cost of energy engineerings ( catcher ) . Modelers have to do premises about parametric quantity values in the former instance, while they make direct premises about engineering in the latter.a ) Autonomous energy efficiency bettermentThe decoupling of economic growing and energy usage is normally represented by an exogenic parametric quantity referred to as the independent energy efficiency betterments ( see e.

g. ( Jakeman, 2004 ) ) . The AEEI is a heuristic step of all non-price goaded betterments in engineering, which in bend affect the energy strength. It may be changeless or follow some estimated non-linear clip tendencies. The usage of changeless AEEI footings in energy-economy mold follows the premise that the invention of new energy engineerings is related to a big figure of minor betterments which come largely from using consequences from the common, bit by bit germinating pool of cognition ( Jacobsen, 2001 ) .

B ) Bacsktop engineeringsAnother attack to include proficient advancement used in many macroeconomic theoretical accounts is the incorporation of exogenously provided distinct new engineerings. These backstop engineerings are energy beginnings that are already known, but non yet commercial. Since the monetary value mechanism determines the production engineering used, backstop engineerings come into drama as, on the one manus, they mature and costs fall with technological advancement and, on the other manus, production costs of conventional engineerings rise, either due to the depletion of conventional energy resources or environmental policies and associated monetary values increases. It is normally assumed that a catcher engineering is available in limitless supply at a changeless – and normally comparatively high -marginal cost, i.

e. monetary value of the catcher. The high costs of the catcher engineerings reflect the associated costs of R & A ; D investings. The upper bound to which energy monetary values addition is so given by the production cost of the bad hereafter engineerings. Backstop engineerings eliminate the consequence of increasing energy costs reported by other theoretical accounts. In long-run theoretical account projections, catcher engineerings frequently provide a big per centum of planetary energy by the center of the century. Consequently, the false handiness and cost of catcher engineerings have of import impacts on theoretical account results ( Manne and Richels 1994 ) .

Energy-economic theoretical accounts typically include either or both fossil and non-fossil catcher engineerings. Backstop engineerings are sometimes strictly generic, man-made engineerings. Sometimes they are more to the full specified or bing engineerings. Examples are carbon-free electric power coevals with solar power engineerings such as photovoltaic or fuel cells, ethyl alcohol from biomass, atomic merger, and advanced dodos fuel coevals engineerings such as shale oil ( see, for case, ( Babiker, 2009 ) , ( Manne, 1999 ) ) .Backstop engineerings in macroeconomic theoretical accounts are a particular signifier of alleged “ engineering snapshots ” . Technology snapshot theoretical accounts describe in considerable item hereafter available engineerings. Particularly bottom-up technology theoretical accounts specify many alternate engineerings for energy production. This can be besides done in intercrossed top-down and bottom up theoretical accounts ( Bohringer, 1998 ) .

The different engineering snapshots substitute each other harmonizing to some economic standards over clip ( Edmonds, 2000 ) . Discrete engineering pick theoretical accounts make premises about the technological diffusion, i.e. premises about the grade of incursion for bing engineerings together with premises on single technological advancement. Exogenous technological alteration, specified in one of these ways, is able to measure the effects of replacing the bing capital stock with more energy efficient engineerings, i.e. the consequence of proficient advancement, but it can non pattern facets like invention or diffusion. Particularly, it can non see engineerings potentially developed in the hereafter.

5.3. Endogenous specification of technological alteration

a ) Investing in R & A ; DA newer category of patterning attacks treats invention as a merchandise of expressed investing in research and development. This attack is inspired by macro theoretical accounts of induced technological alteration ( ( Romer, 1990 ) , ( Lucas, 1988 ) and ( Grossman, 1994 ) ) . The new growing theory physiques on the acknowledgment that technological invention is an economic activity. It arises from the attempts of profit-maximising agents within the economic system and is an endogenous response to Schumpeterian net income inducements. Knowledge is explicitly treated as non-rival and non ( to the full ) appropriable. Investing in R & A ; D generates spillovers, or positive outwardnesss, which allow an economic system to turn boundlessly.

These deductions of the new growing theory for technological alteration and long-term economic growing stand in contrast to conventional neoclassical growing theoretical accounts with exogenic proficient alteration and diminishing returns to investing in physical capital in which income per capita does non turn in the steady-state. In the new growing theory literature, endogenous technological alteration focuses on impersonal technological alteration and sum R & A ; D outgo, while induced technological alteration focuses on the way of R & A ; D attempts and prejudices in technological alteration ( Jaffe et al. 2000 ) .

The induced invention hypothesis is presented in clime alteration theoretical accounts by Carraro ( 1998 ) , Nordhaus ( 1999 ) , Goulder and Schneider ( 1999 ) , Buonanno et Al. ( 2000 ) and Goulder and Mattai ( 2000 ) .B ) Spillover EffectSpillover effects from investing in R & A ; D, or positive technological outwardnesss, provide the beginning for long-run growing in the macro-level new growing theory. Empirical surveies demonstrate the significance of spillovers ( Griliches 1992 ) . With external economic systems, the societal rate of return exceeds the private rate of return on investing in R & A ; D. There is grounds that research has a societal return of 30 to 70 per centum per annum as compared to private returns on capital of 6 to 15 per centum per annum ( Jakeman, 2004 ) . The cardinal function of spillovers makes their incorporation in the mold of induced technological alteration jussive mood. However, in firm-level invention theory, spillovers affect investing inducements prior to invention, since inventions are non to the full appropriable with spillovers.

In this framerwork spillover effects are no longer purely positive outwardnesss. Since the underlying mechanisms of invention and spillovers are presently incompletely understood, ( Weyant, 1999 ) suggest the usage of spillovers merely as a heuristic mold tool that accounts for the macro-level observation. Appropriability and spillovers should be separated: Firms invest in R & A ; D given some expected approbiability of cognition as described in the old subdivision.

Spillovers are overlaid on this theoretical accounts as an add-on, purely positive characteristic ensuing from old investing determinations. The degree of investing in R & A ; D is so governed by private investing inducements, but the rate of invention with spillovers may be higher than the several rate without. Spillovers may be intrasectoral or intersectoral, local or international.

degree Celsius ) Technological acquisitionInitial installings of technological inventions are frequently expensive. Costss decline as persons, endeavors and industries gain experience with them. The acquisition or experience curve describes technological advancement as a map of roll uping experience with the production ( learning-by-doing for makers ) and the usage ( learning-by-using for consumers ) of a engineering during its diffusion. Technological acquisition has been observed historically for many different industries and is a well-established empirical construct. Several writers suggest larning curves as a meaningful presentation of technological alteration in planetary energy theoretical accounts ( e.g. ( Azar, 1999 ) ) .

Learning-byA­doing in engineerings or systems as a beginning of proficient alteration was foremost emphasized by ( Arrow, 1962 ) The Boston Consultancy Group ( BCG 1968 ) established the experience curve construct, associating entire costs and cumulative measure. It takes into history all parametric quantities that influence the sum costs of a merchandise such as production betterments ( procedure inventions, larning effects and scaling attempts ) , merchandise development ( merchandise invention, merchandise redesign, and merchandise standardisation ) , and lessenings in procedure input costs ( IEA, 2008 ) and traces them through technological and merchandise rating. ( Kahouli-Brahmi, 2007 ) show that engineering acquisition may hold a larger impact on technological advancement than the initial procedure of development itself.

5.4. Impact Assessment Model

This subdivision surveys recent developments in technological mold within economic system broad theoretical accounts.

As already pointed out, the incorporation of endogenous proficient alteration is hard and therefore normally neglected. It requires the mold of economic procedures with outwardnesss and increasing returns to scale. Introducing endogenous proficient alteration makes the theoretical accounts extremely non-linear systems and significantly increases the computational complexness. The non-convex optimisation raises the hard computational job of happening a alone optimum.Most top-down theoretical accounts rely on exogenic technological alteration. They normally incorporate an AEEI parametric quantity and let for backstop engineerings. Typical CGE theoretical accounts are GEM-E3, GREEN, PACE and MIT-EPPA.

The General Equilibrium Model for Energy- Economics-Environment ( GEM-E3 ) is a estimable general equilibrium theoretical account for the European Union member provinces that links the macro-economy with inside informations of the interaction with the environment and the energy system ( Capros, 2011 ) . Technological alteration in GEM-E3 is characterized by a changeless AEEI parametric quantity. The same is true for PACE, a large-scale mold system designed to analyse the economic deductions of environmental policies ( Bohringer, 2002b ) , and the OECD GREEN theoretical account, which assumes an AEEI parametric quantity of 1 per centum ( Burniaux, 1992 ) In add-on, the GREEN theoretical account has a alleged putty/semiputty dynamic construction. Two sorts of capital goods coexist in each period: capital installed in old periods, and new capital as a consequence of investing in the current period. To include endogenous technological alteration, a vintage re-calibration is applied at the beginning of each period and parametric quantities of the production construction are modified to reflect the altering composing of capital ( Beghin, 2002 ) . Substitution between energy and labour is more executable in the most recent vintages. Hence, increased capital accommodation or replacing rates increase technological advancement since energy can be better substituted by other inputs ( Burniaux, 1992 ) The RICE integrated assessment theoretical account for climate alteration policy analysis ( Nordhaus, 2010 ) .In the macroeconometric energy-environment-economy theoretical account for Europe ( E3ME ) , induced technological alteration is modeled utilizing Kaldor ‘s proficient advancement map.

E3ME is an econometric input-output theoretical account with 32 sectors and 14 EU parts ( Barker, 1998 ) . The chief endogenous variables in E3ME, e. g.

technological alteration, are determined from maps estimated on historical informations for European energy usage and the economic system. ( Carraro, 1997 ) include induced proficient alteration in the WARM theoretical account utilizing once more a latent variable attack with regard to the capital stock. WARM is an econometric general equilibrium theoretical account estimated for 12 EU states. In WARM, an addition in a house ‘s R & A ; D outgo, which depends inter alia on policy variables such as environmental revenue enhancement and invention subsidies, leads to more environment-friendly capital.Bottom-up theoretical accounts are about entirely engineering snapshot theoretical accounts that examine a suite of technological options over clip.

A figure of bottom-up theoretical accounts have integrated endogenous technological alteration that assumes LBD. Examples are MESSAGE ( Kahouli-Brahmi, 2007 ) and market allotment, called MARKAL. MESSAGE and MARKAL are dynamic additive scheduling theoretical accounts of the energy sector ( bottom-up ) , that are by and large used in a tandem with the MACRO ( top-down ) macro-economic theoretical account which provides economic informations for the energy system ( Manne, 1978 ) .

They optimize a pick between different engineerings utilizing given abatement costs and C emanation marks. Both theoretical accounts account for the significant uncertainness associated with the clip of reaching and public presentation of new engineerings by using a stochastic instead than a deterministic optimisation technique. Cost and public presentation information of a assortment of advanced renewable and fossil-fuel-based alternate energy engineerings are put into the theoretical account ( engineering snapshots ) . However, there is no mold of technological alteration, merely acceptance of different available engineerings. MARKAL considers 13, MESSAGE 77 engineerings. Both include six learning engineerings.

POLES adds other characteristics of the invention procedure. The portion of proficient potency that is realized as economic potency for a engineering is described by a logistic curve and depends on the payback period. The payback period besides influences the coefficient depicting the velocity of diffusion in a logistic diffusion curve ( Kahouli-Brahmi, 2007 ) .


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