Modelling 3 Modelling the green economy
National governments often formulate long-term development objectives and a strategic approach to achieving them articulated in a development plan. A description of policies and measures to achieve the stated development goals forms the basis for shorter- term decision-making, such as the expenditure and revenue-raising plans reflected in the annual budget. Quantitative models have been developed to approximate the relationships among policy measures and development objectives.
3.1 A characterisation of modelling approaches
Over the last 40 years, a variety of applied models and modelling methods have been developed to support national planning. Among those tools, the most commonly used today include: Disaggregated Consistency (DC) models, Computable General Equilibrium (CGE) models, Macro-Econometric (ME) models and System Dynamics (SD) models.2
These
methods have proven useful to different degrees for various kinds of policy analyses, especially for mid- short-term financial planning. While
recent global
developments have stressed the importance of jointly addressing the economic, social, and environmental dimensions of development, most of the methods mentioned above do not effectively support integrated long-term planning exercises.
More specifically, CGE models are based on a matrix of flows concept, where actors in the economy interact according to a specified set of rules and under predetermined equilibrium conditions (Robinson et al. 1999). Initially conceived to analyse the economic impact of alternative public policies, e.g. those that work through price mechanism, such as taxes, subsidies, tariffs, recent CGE models include social indicators (Bussolo and Medvedev 2007) and environmental ones (OECD 2008). Macro-Econometric (ME) models are developed as combinations of macroeconomic identities and behavioural equations, estimated with econometric methods (Fair 1993), and they are largely used by national and international financial organisations to support short and mid- term macroeconomic policy analysis, such as general fiscal and monetary policies. Disaggregated Consistency (DC) models consist of a combination of
2. For more information on models for national development, planning see Pedercini (2009).
spreadsheets representing the fundamental national macroeconomic accounts, and enforcing consistency among them; well-known examples of such category of models include the World Bank’s RMSM-X (Evaert et al. 1990) and the International Monetary Fund’s FPF (Khan et al. 1990), mostly used to analyse the macroeconomic impact of adjustment programmes. The three methods described above focus primarily on the economic aspects of development, and in general are not designed to support integrated, long-term planning exercises.
As a technique to analyse a variety of development issues (Saeed 1998), including national policy analysis (Pedercini and Barney 2009), the methodology of systems dynamics (SD), conceived in the late 1950s at the Massachusetts Institute of Technology (MIT), has greatly evolved over the last 25 years (see Forrester 1961 for early examples on the use of this methodology). Specifically, the SD method has been adopted in various instances to analyse the relationship between structure and behaviour of complex, dynamic systems. In SD models, causal relationships are analysed, verified and formalised into models of differential equations (see Barlas 1996), and their behaviour is simulated and analysed via simulation software. The method uses a stock and flow representation of systems and is well suited to jointly represent the economic, social, and environmental aspects of the development process.
3.2 The Threshold 21 World model
The approach proposed uses system dynamics as its foundation and incorporates optimisation (for technical choice in the energy sector), econometrics (for parameters of production functions) in the construction of the model, and simulations to illustrate possible alternative futures.
The model developed for the GER, largely drawing upon the Threshold 213
family of models created by
the Millennium Institute (see, among others, MI 2005, Bassi 2010b), builds on assumptions (structural and numerical) from existing detailed sectoral economic and physical models into a comprehensive structure that generates scenarios of what is likely to happen throughout an integrated economic, social, and environmental system (see Figure 2).
3. The name Threshold 21 comes from the belief that the 21st century is going to be a threshold period for humankind.
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