Annex 4 analytical methods

The structure of E3ME is based on the system of national accounts, as defined by the ESA 95 system [1], with further linkages to energy demand and environmental emissions. The labour market is also covered in detail, with estimated sets of equations for labour demand, supply, wages and working hours. In total there are 29 sets of econometrically estimated equations, also including the components of GDP (consumption, investment, international trade), prices, energy demand and materials demands. Each equation set is disaggregated by country and by sector. E3ME's historical database covers the period 1970-2010 and the model projects forward annually to 2050. The main data sources are Eurostat, DG ECFIN AMECO database and the IEA, supplemented by the OECD's STAN database and other sources where appropriate. Gaps in the data are estimated using customised software algorithms.

The model covers 69 economic sectors, 43 categories of household expenditure, 22 different users of 12 different fuel types,16 different material users of 8 different mineral material types plus water, 14 types of air-borne emissions (where data are available) including the six greenhouse gases monitored under the Kyoto protocol, 13 types of household, including income quintiles and socio-economic groups such as the unemployed, inactive and retired, plus an urban/rural split.

[1] https://ec.europa.eu/eurostat/statistics-explained/index.php/Glossary:European_system_of_national_and_regional_accounts_(ESA95)

There are three categories of inputs to the model: (time series) data, assumptions on basic economic parameters and values, and scenario variables describing the policy option that is to be examined. Data include

• output (constant and current price bases)
• Gross Value Added (GVA) at market prices and factor cost
• investment
• R&D spending
• household expenditure (by product)
• government final consumption (by category)
• exports
• imports
• employment
• labour costs (current prices)
• average working hours.

In addition, there are time series for population and labour force.

Assumptions include:

• market exchange rate, local currency per dollar, current prices
• long-run interest rate
• short-run interest rate (only used for comparative purposes)
• change in government final consumption, year on year
• % of government consumption spent on defence, education and health
• standard VAT rate
• aggregate rate of direct taxes
• average indirect tax rates
• ratio of benefits to wages (giving implicit rate)
• employees’ social security rate
• employers’ social security rate

Policy options can be described using the following parameters:

• annual CO2 tax rate, € per tonne of carbon
• annual EU ETS allowance prices, € per tonne of carbon (if level of ETS caps are unknown)
• annual ETS emissions caps, thousand tonnes of carbon
• switches to include different energy users in the policies
• switches to include different fuel types in the policies
• switch to set EU ETS policy to use caps (endogenous price) or exogenous ETS
• prices
• annual energy tax rate, € per toe
• switches to include different users in policies
• switch to include different fuel types in policies
• switch to differentiate tax rates for different groups, e.g. industries or households
• annual material tax rates for seven types of materials, in percentage cost increase
• switches to include different material users in policies

In addition, the model includes options to recycle automatically the revenues generated from carbon taxes, energy taxes, ETS (with auctioned allowances) and materials taxes. There are two options in the model for how the revenues are recycled:

• To lower employers’ social security contributions;
• To lower income tax;
• To increase levels of R&D spending.

Outputs produced by the model include:

• GDP and its aggregate components (household expenditure, investment, government expenditure and international trade)
• sectoral output and Gross Value Added (GVA), prices, trade and competitiveness effects
• international trade by sector, origin and destination
• consumer prices and expenditures
• sectoral employment, unemployment, sectoral wage rates and labour supply
• energy demand, by sector and by fuel, energy prices
• CO2 emissions by sector and by fuel
• other air-borne emissions
• material demands

E3ME is capable of producing a broad range of economic, energy and environment indicators. The following list provides a summary of the most common outputs:   GDP and its aggregate components (household expenditure, investment, government expenditure and international trade) sectoral output and GVA, prices, trade and competitiveness effects on consumer prices and expenditures, and implied household distributional effects sectoral employment, unemployment, sectoral wage rates and labour supply energy demand, by sector and by fuel, energy prices, CO2 emissions by sector and by fuel other airborne emissions material demands.  Each of these is available at national and EU levels, and most are also defined by economic sector. This list is by no means exhaustive and the delivered outputs often depend on the requirements of the specific analysis. In addition to the sectoral dimension mentioned in the list, all indicators are produced at the Member State level and annually over the period up to 2050. The measures of endogenous technical change that are included in E3ME are allowed to influence key economic relationships, as well as energy and material demands.

Although E3ME can be used for forecasting, the model is more commonly used for evaluating the impacts of an input shock through a scenario-based analysis. The shock may be either a change in policy, a change in economic assumptions or another change to a model variable. The analysis can be either forward looking (ex-ante) or evaluating previous developments in an ex-post manner. Scenarios can be used either to assess policy, or to assess sensitivities to key inputs, such as international energy prices.

The model provides support for the resource efficiency flagship initiative and sustainability assessment.

• Climate action 
• Institutional affairs 
• Economy, finance and the euro 
• Energy 
• Environment