Validating Energy-Oriented CGE Models

By Jayson Beckman, Thomas W. Hertel, W. Tyner. GTAP Working Paper, 2009

160 citations recorded by the source corpus.

Although CGE models have received heavy usage, they are often criticized as being insufficiently validated. Key parameters are often not econometrically estimated, and the performance of the model as a whole is rarely checked against historical outcomes. As a consequence, questions frequently arise as to how much faith one can put in CGE results. In this paper, we employ a novel approach to the validation of a widely utilized global CGE model – GTAP-E. By comparing the variance of model generated petroleum price distributions -- driven by historical demand and supply shocks to the model-- with observed five-year moving average price distributions, we conclude that energy demand in GTAP-E is far too price-elastic over this time frame. After incorporating the latest econometric estimates of energy demand and supply elasticities, we revisit the validation question and find the model to perform more satisfactorily. As a further check, we compare a deterministic global general equilibrium simulation, based on historical realizations over the 2001-2006 period during which petroleum prices rose sharply, along with growing global energy demands. As anticipated by the stochastic simulations, the revised model parameters perform much better than the original GTAP-E parameters in this global, general equilibrium context.

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/d79a7e920c5110be4ee47b6f44d31b7250c25be0

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Citations in the corpus

Correlations between biofuels and related commodities before and during the food crisis: A taxonomy perspective (2012, background): “…impacts of biofuels, which are based on long-run parameters (the leading source being GTAP database of Thomas Hertel et al., for recent references see Beckman et al. (2011)) and on partial or general equilibrium economic theory, assume links between prices of food, biofuels and fossil fuels.”
Biofuel-related price transmission literature: A review (2013, background): “These models have however been widely criticized for not being sufficiently validated against historical data and perform poorly (Beckman et al., 2011).”
Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets (2010, unknown): “…to permit us to analyze their relative importance, we augment the supply- side shocks (as derived from Valenzuela et al. 2007) by adding volatility in energy markets (specifi cally oil) and in aggregate demand (as proxied by volatility in national GDPs) following Beckman, Hertel, and Tyner (2011).”