place by fuel switching (inter-fuel substitution) or energy savings (either by fuel-non-fuel substitution or by a scale reduction of production and final demand activities).12 Given the paramount importance of the electricity sector as the major source of CO2 emissions in the EU, the standard representation of power production through a single CES production (cost) function is replaced by a bottom-up activity analysis characterization where several discrete generation technologies compete to supply electricity to regional markets. The price of electricity then is determined by the production costs of the marginal supplier. Power generation technologies respond to changes in electricity prices according to technologyspecific supply elasticities. In addition, lower and upper bounds on production capacities can set explicit limits to the decline and the expansion of technologies.
3.2 Data The model builds on the most recent GTAP dataset (version 7) with detailed accounts of regional production, regional consumption, bilateral trade flows as well as energy flows and CO2 emissions for the base year 2004 (Badri and Walmsley, 2008). The dataset also features a variety of initial taxes. As is customary in applied general equilibrium analysis, base year data together with exogenous elasticities determine the free parameters of the functional forms. Elasticities in international trade and sectoral value-added are based on empirical estimates reported in the GTAP database. Substitution elasticities between production factors capital, labor, energy inputs and non-energy inputs (material) are taken from Okagawa and Ban (2008) who use most recent panel data across sectors and industries for the period 1995 to 2004. As to sectoral and regional model resolution, the GTAP database is aggregated towards a composite dataset that accounts for the specific requirements of international climate policy analysis (see Table 1). Table 1: Model sectors and regions Sectors and commodities Energy Coal (COL) Crude oil (CRU) Natural gas (GAS) Refined oil products (OIL) Electricity (ELE) Non-energy Energy-intensive Industries (EIS) Transport (TRN) Rest of Industry (ROI)
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Countries and regions Industrialized regions EU-27 (EU) USA Japan Russia Other OECD countries Developing regions China India Brazil OPEC Rest of the developing world
Revenues from emission regulation accrue either from CO2 taxes or from the auctioning of emission allowances (in the case of a grandfathering regime) and are recycled lump-sum to the representative agent in the respective region.
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