The Economic and Environmental Impacts of Changing Energy Prices on the Food Supply Chain in Northern Ireland

Erin Smith Minihaneminihan01@qub.ac.uk

Overview• Background (1)

– The economy, energy, environment nexus

• Research Question (1)– What are the economic and environmental impacts of energy price change?

• Theoretical framework (6)– Direct and indirect economic effects– Food supply chain– Environmental effects– A case for general equilibrium

• Methodology (4)– Computable general equilibrium– Data requirements– The model– Interpreting the results

• Discussion (1)

Background: the energy, economy environment nexus

• Meeting economic and environmental objectives – No longer appropriate to evaluate in isolation of one

another– Particularly when looking at energy issues

• Why Northern Ireland?– Energy security (volatile world energy markets)– Environmental security (GHG obligations)– Economic security (lifestyle)

Research Question

• What are the economic and environmental impacts of energy price change?

• Is the impact different for the food supply chain?

• Does the presence of a renewable energy sector influence these impacts?

Theoretical Framework: direct economic effects

• Supply channel-changes in production – Changes variable cost of production and therefore potentially

output and output prices– The larger the share of energy costs in production, the stronger

the transmission of energy price change

• Demand channel-changes in consumption – Can easily be extended to describe household and firm behavior– Discretionary income effect (less non-energy consumption)– Operating and uncertainty effects (durables or energy intensive

purchases)

Theoretical Framework: indirect economic effects

• Indirect effects may be more important (Kilian 2008)

• Reallocation effects, shifting factors amongst sectors of the economy, may be influenced by

• The presence of a renewable energy sector• The type of price shock (demand, supply, and policy)

Theoretical Framework: the food supply chain

• Food is itself a form of stored energy

• Agriculture and food processing use a considerable amount of energy

• The same processes used to produce food can produce other forms of energy

• Potential to co-produce food and energy by utilizing waste products from agriculture and food processing

Theoretical Framework: environmental impact• Different energy sources have

different environmental impacts

• The relative prices determine howmuch of each source is used

• Need to consider both the technical and economic aspects of energy-related environmental issues

Theoretical Framework: a case for general equilibrium

• Energy prices influence GHG emissions by– Changing overall energy consumption (a movement

along the demand curve)– Triggering an increase in energy efficiency (a shifting

of the demand curve)

• Both theoretically decrease emissions ceteris paribus in the partial equilibrium context

Theoretical Framework: a case for general equilibrium• Net impact uncertain

• If a large energy producer, an increase in energy price could increase income and trigger consumption

• An increase in energy efficiency could also trigger consumption – A reverse discretionary income effect – Backfire and rebound effects

Methodology

• General Equilibrium Approach– Captures indirect and reallocation effects– Agents act within the context of the wider economy – Able to track environmental impact accounting for

linkages between markets (rebound and backfire effects)

• Computable General Equilibrium – Model calibrated to a national economy

– reflecting the unique character

Methodology: data requirements

• Input-Output (I-O) Table tracking intermediate demand amongst sectors and final demand by households– I-O Table 2002 (Wu and Keatley)– Updating table to 2005 data using cross entropy approach

• Social Accounting Matrix (SAM) to capture non-market monetary flows between government, households and firms

Methodology: the model

• System of equations – Constrained optimization of consumer and producer problem

using microeconomic theory and market clearing equations

• Calibrate using SAM to recreate the baseline

• Impose shocks on the model to explore the net impact on economic and environmental variables

Methodology: interpretation of results

• Not a forecasting tool– Prices are relative to the numeraire – not market prices

• Calibration is limited by data availability – quirks in the base year can influence results– Time-series may not be available to econometrically estimate elasticities

Discussion

• Thank you

• Questions or suggestions now?

• Questions or suggestions later?

• Erin.Minihan@afbini.gov.uk

References

• Kilian, L. (2008). "The Economic Effects of Energy Price Shocks." Journal of Economic Literature 46(4): 871-909.

• Welsch, H. (2008). "Armington elasticities for energy policy modeling: Evidence from four European countries." Energy Economics 30(5): 2252-2264.