As summarised in the figure, the two models that were applied in our framework are the Cambridge Econometrics’ vehicle stock model and E3ME.
The vehicle stock model
Cambridge Econometrics’ vehicle stock models calculates vehicle fuel demand, vehicle emissions and vehicle prices for a given mix of vehicle technologies. The model uses information about the efficiency of new vehicles and vehicle survival rates to assess how changes in vehicles sales affect stock characteristics. The model also includes a detailed technology sub-model to calculate how the efficiency and price of new vehicles are affected by increasing take-up of fuel efficient technologies. The vehicle stock model is highly disaggregated, modelling 16 different technology types across three different size-bands of vehicle (small, medium and large).
Some of the outputs from the vehicle stock model (including fuel demand and vehicle prices) are then used as inputs to E3ME, an integrated macro-econometric model, which has full representation of the linkages between the energy system, environment and economy at a global level. The high regional and sectoral disaggregation (including explicit coverage of every EU Member State) allows modelling of scenarios specific to Sweden and detailed analysis of sectors and trade relationships in key supply chains (for the automotive and petroleum refining industries). E3ME was used to assess how the transition to low carbon vehicles affected household incomes, trade in oil and petroleum, consumption, GDP and employment.
E3ME is a macro-econometric model; this means that the parameters within the model are estimated based on more than 40 years of historical data and relationships. There is only minimal economic theory embedded within the modelling framework:
- institutional behaviour (e.g. of an industry) is specific to a region over a time period (i.e. industries do not all respond to the same stimulus in the same way, and neither does the same industry in different regions)
- the model is demand-led; production is changed in response to changes in demand, which is driven by changes in income and expenditure patterns
- production is assumed to take place under conditions of uncertainty, institutional rules and imperfect competition, and as a result there are variable returns to scale
- demand for labour, investment and energy (directly and in production processes) are derived indirectly from consumers’ demand
- the supply of money can be expanded to meet the needs of the real economy (“endogenous money supply”); the implication being that there is no upper limit on finance available for sound investments, and therefore new investment can be created without investment in other parts of the economy decreasing – although all investment must be ‘paid for’, i.e. increased investment feeds through to increased prices.
E3ME is often compared to CGE (Computable General Equilibrium) models. In many ways the modelling approaches are similar (in that they have similar inputs and outputs); however, E3ME offers some advantages due to its theoretical differences, including:
- varying competition across sectors
- varying returns to scale
- product supply-demand balance
- the model allows for both voluntary and involuntary unemployment
Implications for the analysis
A key distinction between macro-econometric and CGE models is the assumptions regarding equilibrium states. In CGE models, in the long run, actors are assumed to act rationally, and as such markets clear and there is full (or close to full) use of resources (because, for example, workers reduce their demanded wage, or industry increase their offered wage, until demand and supply for workers is balanced). E3ME instead determines behaviours on an empirical basis and does not assume optimal behaviour.
This has important practical implications for the scenario analysis. While the assumptions of optimisation in CGE models mean that all resources are fully utilised, it is not possible to increase employment by changing resource use (and changes in output can only be achieved through shifts between sectors to those with larger multipliers). Similarly, since all investment in the economy is allocated, it is not possible to investment in new capital without reducing investment elsewhere in the economy. However, E3ME allows for the possibility of unused capital and labour resources that may be utilised under the right conditions; it is therefore possible that shifting consumer preferences can lead to increases in investment, output and employment.