A critical factor in projecting energy, water and land use.
How consumption patterns will change as income grows will have major impacts on human interaction with the Earth system. The relationship between income and food consumption, transportation services and other goods will affect land, energy and water use. This work explores the behavior of an improved demand modeling system that can better incorporate observed changes in consumption patterns as incomes rise.
As economies grow and develop, statistical evidence indicates they pass through a resource-intensive phase of development into a phase where demands for resource-intensive products grow more slowly than the economy as a whole. Understanding this relationship and accurately capturing it in Integrated Assessment Models (IAMs) is central to understanding projections of future energy-water-land interactions, especially among countries in early- and mid-phases of development.
In standard economy-wide models, the usual functional relationship between income and demand for different goods (their income elasticities) limits the ability to represent how the income elasticity changes over the course of economic development. For shorter-term projections of a decade or two, the usual focus of many economic projections, this inflexibility is not a significant problem. However, for projections of several decades, especially for rapidly growing economies, failure to account for changes in the income elasticity can lead to projections that are inconsistent with statistical evidence. This study demonstrated that, under many circumstances, a Constant Difference of Elasticities (CDE) formulation of demand has enough flexibility to be calibrated to target both own-price (the change in demand for a good when the good’s price changes) and income elasticities of demand. With this formulation we can have more confidence that projections of resource-intensive products over long time periods are consistent with statistical evidence on both income and price, and are responsive of demand as economies develop.
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MIT Joint Program on the Science and Policy of Global Change
The study was funded by the U.S. Department of Energy (DOE) Office of Science under the grant DE-FG02-94ER61937, the U.S. Environmental Protection Agency and other government, industry and foundation sponsors of the MIT Joint Program.
Chen, Y.-H. Henry, 2017: The Calibration and Performance of a Non-homothetic CDE Demand System for CGE Models, Journal of Global Economic Analysis, doi:10.21642/JGEA.020103AF.
Photo: Journal of Global Economic Analysis