The Economic Projection and Policy Analysis Model for Taiwan: A Global Computable General Equilibrium Analysis

Taiwan has proposed significant reductions in its greenhouse gas (GHG) emissions in its nationally determined contribution (NDC) to the Paris Agreement on climate change: a 50 percent cut from the business-as-usual level by 2030. Evaluating the impact of such climate mitigation policy on Taiwan is no easy task because its economy depends heavily on international trade, including imports of fossil fuels that account for nearly all of its energy supply. To date, studies assessing the economic impact of emissions reduction policies on Taiwan’s economy have been conducted solely under a single-country modeling framework, which cannot capture global effects such as impacts of climate mitigation policies abroad. To bridge this gap, researchers from the MIT Joint Program on the Science and Policy of Global Change and Taiwan’s Institute for Nuclear Energy Research developed a version of the MIT Economic Projection and Policy Analysis (EPPA) model, a global energy-economic computable general equilibrium (CGE) model, in which Taiwan is explicitly represented.

The new Economic Projection and Policy Analysis (EPPA)-Taiwan model has enabled the researchers to assess (1) how different reference-year data sets affect results of policy simulations, (2) the importance of structural and parameter assumptions in the model, and (3) the importance of explicit treatment of trade and international policy. Using the model, they found (1) higher mitigation costs across regions using data for the year 2011 rather than for 2007 and 2004 data, due to increasing fossil fuel cost shares over time; (2) lower GDP losses across regions under a broad carbon policy using a more complex model structure designed to identify the role of energy and GHG emissions in the economy, because the formulation allows more substitution possibilities than a much simplified production structure; and (3) lower negative impacts on GDP in Taiwan when it carries out its NDC as part of a global policy compared with unilateral implementation because, under a global policy, producer prices for fossil fuels are suppressed, benefiting Taiwan’s economy.

Answering these questions may help researchers and policymakers to become aware of the potential implications of updating the global economic database, demonstrate the impact of model design on results, and highlight the roles of policies implemented abroad in determining the domestic policy implications of Taiwan. Through their evaluation of the first stage of development of the EPPA-Taiwan model, the researchers have identified many additional steps to make the model more realistic.

Abstract: We present and evaluate a new global computable general equilibrium (CGE) model to focus on analyzing climate policy implications for Taiwan’s economy and its relationship to important trading partners. The main focus of the paper is a critical evaluation of data and model structure. Specifically, we evaluate the following questions: How do the different reference year data sets affect results of policy simulations? How important are structural and parameter assumptions? Are explicit treatment of trade and international policy important? We find: (1) Higher mitigation costs across regions using data for the year of 2011, as opposed to cases using the 2007 and 2004 data, due to increasing energy cost shares over time. (2) Lower GDP losses across regions under a broad carbon policy using a more complex model structure designed to identify the role of energy and GHG emissions in the economy, because the formulation allows more substitution possibilities than a more simplified production structure. (3) Lower negative impacts on GDP in Taiwan when it carries out its national determined contribution (NDC) as part of a global policy compared with unilateral implementation because, under a global policy, producer prices for fossil fuels are suppressed, benefitting Taiwan’s economy.