An Optimal Depletion CGE Model: A Systematic Framework for Energy-Economy Analysis in Resource-based Economies

Numerical economic models of energy fall into two general categories: models analyzing within energy sector issues and models examining the interaction between the energy sector and the rest of the economy. The first category are mostly partial equilibrium models with a very detailed and disaggregated representation of the energy sector. Although very useful for sector planning purposes this class of models essentially neglect the interdependence of the energy sector and the rest of the economy. The second category, appropriately called energy-economy interaction models, are multisectoral and general equilibrium models focusing on the relationship between the energy sector and the rest of the economy. These models offer a rich economy-wide picture but are not as detailed as the first category in their specification of the energy sector. For energy-economy interaction analysis a number of models have been employed, including input-output, macro-econometric, and computable general equilibrium (CGE), as well as hybrid of these types. With advances in computation capabilities, however, CGE models have become the standard tool and dominate the mainstream of the economic discipline. The model presented in this paper belongs to the optimal depletion category of computable general equilibrium models. It is an optimization model that solves the inter-temporal depletion problem subject to workings of a multi-sector market economy, where relative prices play a crucial role. Such a formulation establishes general equilibrium linkages between the optimal depletion of the resource and the rest of the economy and thus it provides a systematic framework to analyze energy-economy interactions in resource-based economies.