CHEER (China Hybrid Energy and Economic Research Model)
CHEER is a computable general equilibrium model constructed at School of Environment, Tsinghua University; it is used as a tool for analyzing energy-environment-economy problems.
Model structure is shown in Figure 1. The basic model includes producers and representative consumers, as well as commodity and factor markets. Producers invest in production factors and intermediate inputs, provide goods and services to other producers and representative consumers, and determine the output of goods and services and the optimal input combination under the constraints of production technology according to the principle of cost minimization. Representative consumers earn income through the supply of taxes and factors of production, and, based on the principle of utility optimization, such consumers determine the overall consumption of goods and services and the optimal combination of consumption under budgetary constraints. Price adjustment drives the market for all commodities and factors toward the equilibrium state of supply equaling demand; i.e., the general equilibrium state of overall the economic system.
In the production block, multi-level nested functions are adopted to describe the inputs and outputs that are generated during the production activities. The Leontief function is built in the first level of the nested structure to synthesize KEL (capital-energy-labor) bundles and non-energy intermediate demand bundles into sectoral output at a fixed ratio.
where
= aggregate marketed quantity of domestic output of sector i
= quantity of intermediate input from sector j to sector i
= quantity of value added to sector i
= aggregate market price of sector i
= domestic market price of non-energy commodity m
= aggregate value added market price of sector i
= quantity of m per unit of aggregate output of sector i
= quantity of KLE per unit of aggregate output of sector i
= production tax rate of sector i
In the second level, energy, capital and labor are aggregated by the constant elasticity of the substitution (CES) function, as is typical of CGE models, to simulate the different substitution possibilities across factors in each sector. Our research first couples energy and capital into added value and then couples this result with the labor; the method has been widely used in CGE models. On the third level, the AL bundle is split into labor demand by skill, while the KE bundle is split into energy and capital. On the fourth level, energy demand by fuel type is combined to generate energy output.
where
= quantity of labor input to sector i
= quantity of value added to sector i
= market labor price of sector i
= aggregate value added market price of sector i
= share factor of labor in sector i
= share factor of value added in sector i
= elasticity substitution coefficient between labor and value added
Consumption
In the consumption block, we includes two representative consumers: government and household. The government receives revenues from a variety of tax instruments (income, indirect trade, and factor taxes), net of subsidies and transfers. Government income is allocated to goods and services and the aggregate expenditures are fixed in real terms. Household income comes from labor wages, investment income, and transfer payments, and this income is allocated to goods and savings at an exogenous rate that is calibrated to the social accounting matrix. Each representative household is assumed to maximize utility by consuming different goods and services as modeled by the Linear Expenditure System (LES) specification.
Trade
Similar to other CGE models, the CGE model that we use in our study adopts the Armington hypothesis in the international trade block, which means there is not complete replacement between domestic production and imported production, but there is a certain amount of substitution. The Armington hypothesis is consist with the phenomenon that most sectors include both imports and exports. The model we use assumes that there is an Amington department that is responsible for the distribution of goods in the domestic market. Production, consumption and investment activities do not consume domestically produced goods, but rather Amington goods, which are aggregated according to domestically produced and imported goods. The production of Armington products is also calculated using the CES production function. In terms of exports, domestically produced goods are considered to be the supply to the domestic market in addition to exports, as shown in Figure 2. The distribution of domestically produced commodities is represented by the Constant-Elasticity-of-Transformation (CET) function.
Figure 2. Armington structure
Dynamic
In the dynamic mechanism, the model considers four driving factors: labor growth, capital accumulation, supply changes of natural resources, and improvement of production technologies. The equilibrium solutions for each period are obtained by recursive dynamic mechanisms, as agents are assumed to be myopic and to base their decisions on static expectations about prices and quantities.
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