UCL Institute for Sustainable Resources


Identifying the economic impacts of policy interventions and the distribution of winners and losers

7 December 2021

Computable General Equilibrium (CGE) models are widely used for policy formulation and analysis. Associate Professor Alvaro Calzadilla reflects on the contribution of the macro-economic modelling team in this area. 

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Policy decisions involve choices that will not necessarily benefit all actors in an economy. A public policy to improve the distribution of income, for example, will imply trade-offs, which may differ across different socio-economic groups. Domestic policies may also have repercussions on international markets; for example, critics of the 2003 EU biofuels policies, which aimed to decrease CO2 emissions in the transport sector, highlighted its consequences for indirect land use change outside Europe. Policy makers and stakeholders need to balance trade-offs and promote synergies arising from the delivery of policy objectives. 

Empirical economic models based on theoretical foundations, such as Computable General Equilibrium (CGE) models, offer the possibility to inform evidence-based policy making. In fact, as economy-wide models quantify the direct, indirect and induced impacts of policy interventions and exogenous shocks (e.g. climate change, Covid-19), policy makers and stakeholders have the possibility to assess and compare the expected impacts of alternative policies and adaptation options across households, sectors and countries. The use of CGE models for policy analysis dates back to 1960, when Leif Johansen developed a model for Norway.  

The UCL Environmental Global Applied General Equilibrium (ENGAGE) model, developed by the macro-economic modelling team at ISR, is one of the main tools supporting the analysis of climate, environmental, resource, energy and economic policies. While the multi-sector, multi-region nature of ENGAGE allows the evaluation of policies across sectors and across regions, ISR’s macro-economic modelling team also uses detailed country CGE models to assess the impacts across different socio-economic groups. The policy analysis of the macro-economic modelling team supports different ISR research themes and has focused on the following areas: 

  • Climate change and decarbonisation. By assessing the investments required for the decarbonisation of the energy system and the ways in which the transition could be financed, our research shows that the economic impacts of decarbonisation are unevenly distributed between high-income and low-income countries, with the latter group experiencing a larger economic slowdown than the former. The impact is larger when the climate ambition is increased. As low-income countries rely more on fossil fuels out to 2050, financial support for decarbonisation from high- to low-income countries can play a significant role in rebalancing impacts with minimal cost. 
  • Global food production. Land degradation affects a quarter of the global land area. Together with climate change, it is expected to increase the risks to food security in many regions of the world. Our research shows that land degradation impacts are considerable in developing countries, where the decline in soil nutrients are not compensated with fertilizers. Land degradation could significantly amplify the negative impacts of climate change, as the magnitude of its impacts are comparable to worse-case climate change scenarios. However, our research also highlights the role of international trade as a mechanism for adaptation—a functioning global food market is essential for food security. Policies to promote sustainable soil management practices may help to reduce the negative impact on yields caused by land degradation. However, the overall impact on crop production worsens as agricultural workers are exposed to extreme heat conditions, leading to loss of labour productivity. 
  • Resource nexus. By linking a water and a CGE model to capture the dynamic interactions between the Nile’s hydrology, the Grand Ethiopian Renaissance Dam (GERD) and Egypt’s economy, our research shows that coordinated filling and long-term operation of the dam increases the total electricity generation from both the dam and the Nile system. It also sustains Sudan’s water consumption, decreases Egypt’s irrigation water deficits, and increases Egypt’s GDP. Our research highlights the role of cooperation in such a dynamic and complex system, particularly to cope during severe periods of water scarcity. 
  • Circular economy. Our research in this area is particularly innovative. By developing the first global CGE model that represents the circular economy in the steel sector, we found that a green shift towards steel recycling in China brings significant competitiveness and economic gains. However, this shift needs to be aligned with an energy transition in the power sector to avoid carbon emissions generated during the production process. Our analysis contributed a section on the OECD report “Global Material Resources Outlook to 2060: Economic Drivers and Environmental Consequences”, highlighting the economic, resource and environmental gains of increased efficiency of steel-intensive industrial sectors in China and India to similar levels observed in advanced economies. 

As part of two of the five new UKRI Interdisciplinary Circular Economy Centres and the Climate Service for a Net Zero Resilient World Programme, the macro-economic modelling team will continue to support policy formulation and evaluation towards a sustainable future.