Environmental Engineering Reference
In-Depth Information
In the revised database, as we expected, the ''gas'' industry uses resources
and other primary inputs to extract gas, process and refine it, and finally
sells produced gas to the main industries, power plants and the gas distri-
bution industry, ''gdt'', at a wholesale price. The ''gdt'' sector distributes the
gas among its users, which are mainly households, commercial sectors and
non-basic industries with a mark-up over the wholesale price.
4.2 Firms' Demand for Energy Items
Direct substitution between coal and gas has been observed in firms' de-
mand for energy in recent years. Given the expected expansion in gas re-
sources, this phenomenon is anticipated to prevail in future as well. To make
the GTAP-E model consistent with this reality, we introduced a new nesting
structure for firms' energy demand. Unlike the original model, at the very
bottom nest of the new nesting structure, coal and gas (provided either by
''gas'' or ''gdt'') are mixed to represent the direct substitution between gas
and coal. Then at a higher level the combination coal-gas is mixed with oil
and petroleum products to generate the non-electricity energy input. From
this point to the top production function, we preserved the original GTAP-E
nesting structure.
For the elasticities of substitution, we rely on the original GTAP values
except for the following items. The original GTAP-E model assigns a value of
0.5 to the substitution elasticity between capital and energy. This is a key
parameter, which directly affects the changes in the mix of capital and en-
ergy in response to the changes in the relative prices of capital and energy.
For example, when the value of this elasticity is non-zero, a reduction in the
price of energy compared to the price of capital increases the demand for
energy, which eventually leads to an increase in the cost share of energy and
energy intensity. In a set of trial simulations we learned that compared to the
MARKAL model, the GTAP model generates larger changes in the energy
intensity due to the changes in the prices of energy items. The MARKAL
model uses a value of 0.4 for this parameter, so we adopted this value in the
revised GTAP-E model as well.
Finally, we assumed that the elasticity of substitution between coal and
gas is 1 to make the demand for coal and gas responsive to changes in their
relative prices. We also assumed that the substitution elasticity between the
mix of coal-gas and oil is equal to 1. The latter assumption makes the de-
mand system responsive to the changes in relative prices of coal, gas and oil
products.
4.3 Depiction of Natural Resources
The expected boom in shale oil and gas production in the US is due to the
fracking technology, which expands the existing resources. To introduce the
expansion in these resources we altered the way that the GTAP-E model
handles natural resources. The original GTAP-E model has a pool of
