Economic and environmental factors relevant to the Italian energy structure: Theoretical and applicative issues

Abstract

The main objective of the project is to quantify, in the Italian context, some relationships among technology, energy and the economy, which can be used in an existing modeling framework to simulate the impact of atmospheric pollution control policies on the economic system. The framework consists of an Input-Output model with variable coefficients (the PFE model), and a Linear Programming model (MARKAL-Italy), linked by a two-way feedback. The specific object of this project is to expand the energy section of the I/O model to include inter-energy substitution elasticities. For this purpose, econometric models of translog input-demand equations are estimated for thirteen final energy consumption sectors and five energy commodity groups. As a necessary step, a data-base on energy consumption and prices for the various sectors covering the period 1966-1992 is created. A trend decomposition analysis, separating energy consumption in a growth component, an activity mix component and a technological change component, is performed on these data to obtain some insight on the evolution of final energy use. A better understanding of these processes is obtained through a review of energy and environmental policies in Italy over the period considered. Both the quantitative and the descriptive analyses stress the role of fiscal policy on energy products, carried out by the Italian governments, in shaping energy consumption patterns. The effect of including the estimated elasticities in the existing modeling framework is then tested in an experiment in which the technological and economic response of the energy system to changes in CO2 emissions standards is simulated via the LP model MARKAL, and the resulting changes in energy prices are used as inputs into the expanded I/O model. The latter, in turn, measures the impacts of each environmental tax policy scenario on total output, value added, final demand, imports, exports and prices. The results of this experiment, which assumes an explicit tax redistribution scheme, help define the feasibility margin for policy action on CO2 emission standards in the Italian context, indicating the structural changes that would take place as control policies tighten.