It Is Important To Contextualize The Problem
First of all, it is important to contextualize the problem to better understand the aim of their work. There is evidence that, in the future, there will be a significant reduction in the electricity generation capacity caused by the existing power stations across Scotland and UK that are reaching the end of the design life (Allan et al, 2008). For this reason the UK government states that major investment in new power stations is required, and furthermore the new electricity generated should come from renewable energy (Scottish Enterprise and Highlands and Islands Enterprise, 2010). The UK government target is to reach 20% of UK electricity generated from renewable energy. To achieve this target it is required a significant investment. Allan et al., (2008) analyse the impacts of these new investments in terms of both environmental and economic benefit for the Scottish economy. The authors use the example of a substantial marine energy deployment by 2020.
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By and large, input output techniques have been widely used for the analysis of energy issues (Allan et al, 2008). However, the lack of prices adjustment (in the IO model prices are fixed) and infinitely supply behaviour make the IO a very limited framework for impact analysis of big projects, such as investment in renewable energy in a regional economy. Indeed, a regional economy as Scotland is characterized by supply constraint and imperfect labour markets. So, some of these rigidities and particular dynamic adjustment of a regional economies can be better modelled and captured using more sophisticated frameworks, such as regional computable general equilibrium (CGE) model. This is the main reason why Allan et al (2008) quantifies the likely size of the economic impact and the timescale of the project by using a CGE model for the Scottish economy, called AMOSENVI.
This modelling framework allow for greater flexibility related especially to the labour market closures. They use a regional bargaining wage setting with labour supply adjustment through in-migration. Prices and wage dynamic together with change in labour forces are the main elements able to capture the legacy effect of the shock. Indeed, as we can see in the charts reported in the appendix, even beyond the lifetime of the project (35 years) GDP and employment are still above base year values. We notice that such legacy effects are mostly due to a supply side response of a demand-side shock. Such effects unlikely can be found in partial equilibrium models that primary characterized the econometric literature that analyse the impact of additional power generation technology.
Allan et al (2008) perform a demand side shock, by increasing the final demand by the corresponding amount of installing 3GW. The simulations results reported unless specified otherwise are regarded to a model in which real wage is negatively related to the regional unemployment rate (regional bargaining) and, for multi-period setup, net-in migration is positively related to the gap between regional and national (RUK) real wage and negatively related to the gap between regional and national (Rest of UK) unemployment rate.
Because of the model used is not a forecasting model, the simulation strategy used is to insert the costs as shocks to final demand (35 periods) and then zero shocks for 65 periods.
As we can see from diagram 1 in 2020, GDP is at maximum value and lower than expenditure in that years. This because all expenditure is on Scottish commodities but not all expenditures count towards GDP and there because crowding out in sectors as the increase in demand increases wages and the price of intermediate inputs, leading to a lower competitiveness and fall in GDP in these sectors.
This graph show that GDP effects continue after expenditures as the initial expenditures lead to an increase in factor supplies like capital and labour that have a subsequent legacy impact.
The graph 2 shows, first the impact on total employment (in the 2020 is at the max value, then fall, steady and slowly decline) secondly shows the working age population change, brought by increase net migration, caused by the labour market and higher wages.
We notice that additional population is a key factor for the successive legacy effects.
One other key factor is the change in the Scottish wages, as shown by graph 3. In fact between 2006 and 2020, these increase. Then, the real wage is below and the nominal wage slightly above the base year. Between 2031 and 2040 both wages fall and therefore cheaper workers. We can say that whit significant expenditures there are upwards pressure on wages and higher values of the nominal wage indicate that exports are crowded out. In other words, when the demand shock finish the lower nominal wage acts as an incentive to the Scottish economy.
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This, primarily, produces these large legacy impacts. To sum up these legacy impacts are related to this key assumptions: migration parameters, increased wages and lower unemployment rate attract positive net migration (supply shock). Furthermore, capital stock adjustment and investment parameters can be considered as important driver of the results as the sensitivity analysis has shown. The main findings, related with the legacy impacts, of the sensitivity analysis give us important feedback about the size of these effects; when migration is less responsive we have a larger legacy impact, when the investment sensitivity is higher we have less legacy effects because higher speed of adjustment means that capacity constraints are reduced more rapidly and so a big initial stimulus which is reversed quicker.
To sum up this modelling result suggest, as highlighted at the beginning, the Importance of CGE models when we have to consider a policy which has supply-side consequences through net migration and investment. Another advantage of this kind of models is the possibility to test the result’s sensitivity to assumption about the specification of the model and to changes in key variables and, in performing ex-ante scenario (like this) this is essential.
Finally, the authors underline the importance to consider extended lifetime of the investment to analyse the legacy impacts and the potential benefits derived by the implementation of these kind of energy policies.
References
Allan, G.J., Bryden, I., McGregor, P.G., Stallard, T., Swales, J.K., Turner, K. and Wallace, A.R. (2008), “Concurrent and legacy economic and environmental impacts from establishing a marine energy sector in Scotlandâ€Â, Energy Policy, Vol. 36, p. 2734-2753
Scottish Enterprise and Highlands and Islands Enterprise (2010), National Renewables Infrastructure Plan Stage 2, July 2010, available online at http://www.scottish-enterprise.com/your-sector/energy/energy-background/energy-reports/~/media/publications/Energy%20Sector/National%20Renewables%20Infrastructure%20Plan%20Stage%202.ashx
The EU’s target for renewable energy: 20% by 2020 (2008), Authority of the house of lords, London, avaible online at: http://www.publications.parliament.uk/pa/ld200708/ldselect/ldeucom/175/175.pdf
