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The formulation of market equilibrium problems as mixed complementarity problems (MCP) permits integration of bottom-up programming models of the energy system into top-down general equilibrium models of the overall economy. Despite the coherence and logical appeal of the integrated MCP approach, implementation cost and dimensionality both impose limitations on its practical application. A complementarity representation involves both primal and dual relationships, often doubling the number of equations and the scope for error. When an underlying optimization model of the energy system includes upper and lower bounds on many decision variables the MCP formulation may suffer in robustness and efficiency. While bounds can be included in the MCP framework, the treatment of associated income effects is awkward. We present a decomposition of the integrated MCP formulation that permits a convenient combination of top-down general equilibrium models and bottom-up energy system models for energy policy analysis. We advocate the use of complementarity methods to solve the top-down economic equilibrium model and quadratic programming to solve the underlying bottom-up energy supply model. A simple iterative procedure reconciles the equilibrium prices and quantities between both models. We illustrate this approach using a simple stylized model.

Environmental tax schemes in OECD countries often involve tax rates differentiated across industrial, commercial and household sectors. In this paper, we investigate four potentially important arguments for these deviations from uniform taxation: pre-existing tax distortions, domestic equity concerns, global environmental effectiveness, and strategic trade policy. Our primary objective is to ascertain whether the degree of tax differentiation observed in many countries can be rationalized on economic grounds. In simulations with a computable general equilibrium model, we calculate optimal policies under various settings. Our simulation results lead us to conclude that there is little economic rationale for the common policy practice of discriminating strongly in favor of heavy industries, even when accounting for interacting taxes, distributional concerns, leakage, and international market power.

We develop a theory of social planning with a concern for economic coercion, which we define as the difference between consumers' actual utility, and the counterfactual utility they expect to obtain if they were able to set policy themselves. Reasons to limit economic coercion include protecting minorities, preventing disenfranchised groups from engaging in socially costly behavior, or political economy considerations. As long as consumers are fully rational, limiting coercion is equivalent to placing more welfare weight on coerced consumers at the expense of others. If, however, consumers are not fully rational and/or informed, counterfactual utility becomes endogenous to current policy, and the welfare loss associated with limiting coercion increases. We set up a numerical version of our model and find that the error-related welfare loss can be substantial.

In this paper we introduce a computable general equilibrium (CGE) model for the Finnish regional economy, RegFin. This multi-sector and interregional model characterizes economic activity in the regions of Lappi, Pohjois-Pohjanmaa, Kainuu, Keski-Pohjanmaa and the rest of Finland. Unemployment and net migration are determined endogenously within the model. We consider the macroeconomic effects of a regional policy applied to North Finland that is similar to tax reforms which have been implemented in Norway. The key feature of the policy concerns regionally differentiated tax rates. Tax incentives affect individual choices regarding both migration and employment. We also study a value-added tax reform where labour costs are exempted from the tax base. Our simulations seem to indicate that the regional differentiation of the social security payments of the employers and the value-added tax reform could be effective tools of regional policy.

The formulation of market equilibrium problems as mixed complementarity problems (MCP) permits integration of bottom-up programming models of the energy system into top-down general equilibrium models of the overall economy. Despite the coherence and logical appeal of the integrated MCP approach, implementation cost and dimensionality both impose limitations on its practical application. A complementarity representation involves both primal and dual relationships, often doubling the number of equations and the scope for error. When an underlying optimization model of the energy system includes upper and lower bounds on many decision variables the MCP formulation may suffer in robustness and efficiency. While bounds can be included in the MCP framework, the treatment of associated income effects is awkward. We present a decomposition of the integrated MCP formulation that permits a convenient combination of top-down general equilibrium models and bottom-up energy system models for energy policy analysis. We advocate the use of complementarity methods to solve the top-down economic equilibrium model and quadratic programming to solve the underlying bottom-up energy supply model. A simple iterative procedure reconciles the equilibrium prices and quantities between both models. We illustrate this approach using a simple stylized model.

We decompose the economic implications of the Kyoto Protocol at the cross-country level, splitting the total economic impact for each region into contributions from its own emission abatement policy and those from other regions. Our analysis which is based on a large-scale computable general equilibrium model for the world economy indicates that spillover effects are an important consequence of multilateral carbon abatement policies. We calculate a crosscountry matrix for monetary transfer payments which would have to be assigned on a bilateral basis in order to provide compensation for the international spillovers associated with the implementation of the Kyoto Protocol. ; Im Rahmen einer angewandten Gleichgewichtsanalyse untersuchen wir die ökonomischen Auswirkungen des Kioto-Protokolls auf bilateraler Ebene. Hierzu zerlegen wir den gesamten Wohlfahrtseffekt für jede Region in einen Anteil, der auf die eigene Emissionsminderungspolitik zurückzuführen ist und die jeweiligen Anteile (internationale spillovers), die durch Klimaschutzpolitiken in anderen Regionen verursacht werden. Es wird deutlich, daß internationale spillovers einen wesentlichen Beitrag zu den allgemeinen Gleichgewichtseffekten multilateraler Politikmaßnahmen liefern. Wir berechnen eine Matrix von bilateralen Transferzahlungen, die als Ausgangspunkt für politikrelevante Verhandlungen über Kompensationen für internationale spillovers im Zuge der Umsetzung des Kioto-Protokolls dienen könnte.

Policy interventions in large open economies do not only affect the allocation of domestic resources but change international market prices. The change in international prices implies an indirect secondary burden or benefit for all trading countries. This secondary terms of trade effect may have important welfare implications: Countries without change in domestic policies may nevertheless gain or suffer from the action of other countries; in turn, the primary welfare effect of countries interfering domestically may be substantially enhanced or weakened due to international spill-overs. Obviously, policy makers of economies that are integrated into international markets have an essential interest to gain insights about the different sources of welfare changes associated with domestic policy changes. In this paper, we present a decomposition that splits the overall welfare effect into a domestic market effect holding international prices constant and an international market effect as a result of changes in international prices (terms of trade effect). We demonstrate the usefulness of our decomposition approach in the context of an empirical welfare analysis of international carbon abatement policies.