This illustrates the methods and the scale of the economical analyses made in the project CLIMAWARE for estimating the impact of water scarcity on Italy

1. Task 4. Interac*on with
Economy and Society
Task Leader: Stefano Schiavo
Mar5na Sartori
School of Interna*onal Studies
3rd CLIMAWARE SEMINAR
December 2nd, 2015

2. Output of the Task
• Economic effects of changes in water availability
– focus on the agricultural sector
– land use change effects
– environmental policies and regula*ons
• Virtual water trade effects
• Regional coverage: EU (and not Alpine region
only)

3. productivity. Eleven individual countries are considered (Albania, Croatia, Cyprus,
Egypt, France, Greece, Italy, Morocco, Spain, Tunisia, and Turkey) and one aggregated
residual region (XMENA, which stands for "Rest of Middle East and North Africa").
Figure 1. Methodological approach
!
!
!
!
Water!
Available!
for!
Agriculture!
!
System'wide+
Economic+Effects+
Future!
Water!
Availability!
Estimated!
Change!in!
Runoff!
Climate!
Scenario!
Agricultural!
Productivity!
Economic!
Structure!
Trade!
Virtual+
Water+Flows+
Water!
Stock/Runoff!
Relationship!! Other!
Water!Uses!
Crop!
Response!
Income!
and!
Welfare!
!
The methodological approach

4. The economic model 1
• Computable General Equilibrium - CGE models:
“class of economic models that use actual economic data to
es5mate how an economy might react to changes in policy,
technology or other external factors”
1. reproduces the structure of the whole economy and the nature of all
exis*ng economic transac*ons among diverse economic agents
(produc*ve sectors, households, and the government, among
others)
2. rigorous, cuYng-edge quan*ta*ve method to evaluate the impact of
economic and policy shocks -par*cularly policy reforms- in the
economy as a whole

5. The economic model 2
• ”Computable”: use data from real economies, solved on a
computer
• ”General”: several op*mizing agents and markets
• ”Equilibrium”: supply and demand behaviour determined by
op*mizing agents
– firms that a[empt to maximize profits and minimize costs
– households who maximize “welfare” (consump*on) by choosing
consump*on goods according to price
– markets where prices adjust un*l supply and demand are equal —>
market equilibria
• Sta*c or Dynamic –> here sta*c
• Single or Mul*ple Region –> here mul*ple

6. The economic model 3
• From a mathema*cal point of view, the model is a very
large non-linear system of equa*ons
• Structural parameters are set to replicate observa*onal
data in a base year
• Simula*ons entail changing some exogenous variables or
parameters, bringing about the determina*on of a
counterfactual equilibrium
• The par**on between endogenous and exogenous
variables, as well as the regional and industrial
disaggrega*on level, is not fixed

7. Par*al Equilibrium:
Economic Theory + Data
Theory Only Theory with numbers

8. Par*al Equilibrium:
Economic Theory Only
Effect of a Tax: Theore,cal

9. Impact using Numbers
Effect of a Tax: with numbers

10. General Equilibrium:
All markets interac*ng
General Equilibrium:
• Mul*ple markets
• Mul*ple households
• Mul*ple firms

11. An example: the macroeconomic consequences of
a lower agricultural produc*vity
à Go far beyond a drop in produc=on volumes (yields)!
Lower output in agriculture:
1. brings about an increase in the prices of domes*c products, which
become rela*vely more expensive than foreign products
2. this loss of compe**veness causes subs*tu*on of domes*c goods
with imports in the produc*on and consump*on processes
– real devalua*on of the na*onal currency
3. within the agricultural sector, crops are subs*tuted
– the produc*on mix shids toward crops rela*vely more produc*ve (in
this context, crops which are less affected by water shortage)
à Changes in the whole structure for the economic system!

12. Main applica*ons and uses of CGEs
• Fields where CGE models are tradi*onally applied:
– Public Economics –> typical simula*on: fiscal reform
– Interna*onal Trade –> typical simula*on: interna*onal
trade agreement
• Applica*ons in the field of Environmental Economics
are much more recent:
– introduc*on of green taxes
– assessment of climate change impacts, affec*ng factors
produc*vity, or produc*on and consump*on pa[erns
– tool for quan*fying costs and benefits of environmental
policies

13. Why using a CGE model in this contex?
• Solid micro-economic founda*on:
– combina*on of standard theory with detailed data
• General vs par*al equilibrium analysis
– second-order effects
– structural change analysis
– mul*-market complex interac*ons
– able to cope with complex problems
• Quan*fy magnitudes of theore*cal results (important for policy)
– provides “evidence” to support claims
– counterfactual modeling, simula*on exercises
– iden*fy net results of counterac*ng effects
– provide a realis*c quan*fica*on of the policy effects by using real data
– trade-offs between policies can be quan*fied
– able to analyze welfare effects
– benefits and costs can be calculated, and used as evidence to support
par*cular policies

14. Some ”drawbacks” of CGE models
• Specifica*on of func*onal forms
• Calibra*on: they are data demanding
• May become rather complex
• No forecas*ng: only “what-if” scenarios
• No financial and monetary issues
• No norma*ve op*miza*on
• Inappropriate scale analysis

15. Why CGE & Co. are interes*ng
• Flexibility: modular models with theore*cally
sound hypotheses
• Flexibility: easy to interface with other models
for mul*disciplinary research
– IAM and Climate Change
– Land-use models
– Virtual water trade and footprint

16. Integrated Assessment Model

17. The database
• Tables of transac=on values: input-output table
or social accoun*ng matrix (see next slide)
– it covers the whole economy (of a country, or even the whole
world), and dis*nguishes a number of sectors, commodi*es,
primary factors and (perhaps) types of household
– show, for example, the value of coal used by the iron industry
• Elas=ci=es: dimensionless parameters that
capture behavioural response
– For example, export demand elas*ci*es specify by how much
export volumes might fall if export prices went up

18. The database: IO tables
• Input-output table: matrix that depicts inter-
industry rela*onships within an economy,
showing how output from one industrial sector
may become an input to another industrial sector
– column entries represent the monetary value of inputs to
an industrial sector
– row entries represent the monetary value of outputs from
a given sector
– this format shows how dependent each sector is on every
other sector, both as a customer of outputs from other
sectors and as a supplier of inputs
– factors of produc*on (labor, capital, land) and other inputs

19. IO tables: extension
• Environmentally Extended Input-Output tables
• A Social Accoun*ng Matrix (SAM) represents
flows of all economic transac*ons that take place
within an economy (regional or na*onal) among
agents and sectors
– wages firms pay to households
– household’s consump*on of goods
– taxes and transfers administrated by the Government
– …

20. goods. In the SAM, an extra breakdown of the household sector is done to reflect the role
of people in the economy.
Appendix Table 1: The Structure of the SAM
EXPENDITURES
ENDOGENOUS EXOGENOUS TOTALS
FACTORS
HOUSEHOLDS
PRODUCTIVE
ACTIVITIES
GOVERNMENT
RESTOFTHE
WORLD
CAPITAL
ACCOUNT
FACTORS 0 0 T13 X14 X15 X16 Y1
HOUSEHOLDS T21 T22 0 X24 X25 X26 Y2
ENDO-
GENOUS
PRODUCT ACTIVITY 0 T32 T33 X34 X35 X36 Y3
GOVERNMENT L41 L42 L43 t44 t45 t46 Y4
REST OF WORLD L51 L52 L53 t54 t55 t56 Y5
EXO-
GENOUS
CAPITAL ACCOUNTS L61 L62 L63 t44 t45 t46 Y6
RECEIPTSORINCOMES
TOTALS Y1 Y2 Y3 Y4 Y5 Y6
The village SAM for Nana Kotda consists of the following components:
Production activities: The production sectors included in the SAM are: (1) crop
husbandry—wheat, jowar, bajra, maize, tur, other pulses, oilseeds, cotton, fruits and
vegetables, and other crops (cultivation of these crops is divided for irrigated and rainfed

21. Typical Outputs
General Outputs:
• Produc*on Levels
• New Price Levels & Infla*on
• Interna*onal Trade Volume (imports and exports)
• Welfare (Equivalent Varia*on)
• Factor Returns (Wages, Return to Capital)
Specialized Outputs: (if integrated into the basic model)
• Environmental Indicators (CO2, Pollutants)

22. The CGE we use: the GTAP model
• The GTAP consor*um
• GTAP-AEZ, GTAP-W, GTAP-L, etc –> extensions
of the original GTAP-CGE model framework
– land can be transformed into cropland and
pastureland, or into different crop-types, agro-
ecological zones
• RunGTAP
• Regional/sectoral disaggrega*on

23. Grazie
…e adesso tuY a cena!