Presentation of Joaquim Bento Ferreira for the "2nd Workshop on the Impact of New Technologies on the Sustainability of the Sugarcane/Bioethanol Production Cycle" Apresentação de Joaquim Bento Ferreira realizada no "2nd Workshop on the Impact of New Technologies on the Sustainability of the Sugarcane/Bioethanol Production Cycle " Date / Data : Novr 11th - 12th 2009/ 11 e 12 de novembro de 2009 Place / Local: CTBE, Campinas, Brazil Event Website / Website do evento: http://www.bioetanol.org.br/workshop5

1. Land Use Change in Computable
General Equilibrium Models
Joaquim Bento de Souza Ferreira Filho
Escola Superior de Agricultura “Luiz de Queiroz”
Universidade de São Paulo
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2. Plan of presentation
 Computable Equilibrium (CGE) Models in the evolution of
applied economic models.
 Illustrate the main applications and uses of CGE models.
 Point to the main drivers of CGE models.
 Show how CGE models treat Land Use Change
 Point to the new directions and developments.
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3. CGE models
 The most recent development in a long tradition of economic
multi-sector economic planning models
 Initiated with the work of Leontief in the 30’s: Input-Output
(IO) analysis.
 Used when the complex interactions between economic
variables must be taken into account for policy analysis.
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4. IO table for Brazil – 2005 – MAKE MATRIX
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5. IO table for Brazil – 2005 - USE
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6. Input-Output models (IO)
 Consists of explicitly modeling the inter-industry (or users)
flows of products in an economy.
 n linear equations, n unknowns. System solved by matrix
inversion.
 Solution: inputs requirements to satisfy a given vector of final
demands.
 General equilibrium in the production side of a economy.
 Does not take into account restrictions about production
capacity: a solution always exists.
 Fix price models, no substitution in inputs space in
production.
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7. Linear Programming Models
 Have an explicit objective function for optimization
purposes: introduce choices.
 Allow inequality restrictions (non used capacity).
 Explicitly model maximum capacity.
 Generate a dual price system, which represents the
opportunity cost of any production factor (market prices).
 Problem: cannot treat prices endogenously. Resource
allocation in production is not compatible with income
generated in the process. Prices does not change in response
to resource scarcity or excess supply.
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8. Computable General Equilibrium
Models
 Simultaneous solution for prices and quantities.
 Simulates the interaction of many agents with optimizing
behavior in the markets.
 Explicitly model structural features of particular economies,
with complete specification both from the supply and
demand sides.
 REPRODUCE THE CIRCULAR FLOW OF INCOME IN A
GIVEN ECONOMY: incomes generated in the production
side must be consistent with expenditures of agents.
 First CGE model: 1960, Norwegian economy, Leif Johansen.
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9. Equilibrium models
 Equilibrium models solve a set of nonlinear equations that
include market clearing conditions, efficiency or zero-profit
conditions, and income balance equations.
 Equations are paired with unknowns such as:
 market prices
 levels of output by production activity
 Expenditures and savings, etc.
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10. CGE models
 Very data demanding models.
 The IO matrix gives a large part of the information required,
but not all.
 Remaining information: National Accounts, Economic
Censuses, Household Surveys, etc.
 Circular flow and consistency: data organized in a Social
Accounting Matrix (SAM). Double-keeping accounting
method.
 The model is calibrated based on one year picture of a
given economy.
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11. Real flows Money flows An illustrative SAM
Primary Factors Institutions
Produts Labor Capital Capital Stocks Rest of TOTAL
Activities (Land) Household Governme Account the World
Activities Domestic Exports Domestic
Supply Productio
n Value
Produts Intermed. Househ Governme Investimen Stocks Supply in
use Consump Consumpt the
Domestic
Market
Factors
Labor wages Labor
Income
Capital rents Capital
(Land) Income
Institution
Household Wages Rents Transfers Household
Income
Governm Indirect Tariffs Direct Capital Governme
taxes taxes nt Income
Capital Savings Savings Capital Savings
Account
Stocks Stocks Stocks
Rest of Imports Capital Income
the World from
Overseas
Domestic Supply in Labor Capital Household Governme Capital Stocks Payments
TOTAL Productio the Income Income Expenditu nt Account to
11 n Value Domestic res Expenditu Overseas
Market res

12. Partial equilibrium analysis Demand
Supply
Primary Factors Institutions
Produts Labor Capital Capital Stocks Rest of TOTAL
Activities (Land) Household Governme Account the World
Activities Domestic Exports Domestic
Supply Productio
n Value
Produts Intermed. Househ Governme Investimen Stocks Supply in
use Consump Consumpt the
Domestic
Market
Factors
Labor wages Labor
Income
Capital rents Capital
(Land) Income
Institution
Household Wages Rents Transfers Household
Income
Governm Indirect Tariffs Direct Capital Governme
taxes taxes nt Income
Capital Savings Savings Capital Savings
Account
Stocks Stocks Stocks
Rest of Imports Capital Income
the World from
Overseas
Domestic Supply in Labor Capital Household Governme Capital Stocks Payments
TOTAL Productio the Income Income Expenditu nt Account to
12 n Value Domestic res Expenditu Overseas
Market res

13. How is land treated in these models?
 Land is a primary factor of production, like labor and capital
(and perhaps natural resources).
 It’s a factor which limits the supply response of the economy.
 In the SAM the amount of land is represented by it’s
payments as a factor of production (or rentals), just like
capital. Actually, land rentals must be disaggregated from
capital rentals (Gross Operational Surplus in agricultural
activities) in the National Accounts.
 Two general formulations: labor demand and labor supply.
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15. The Constant Elasticity of
Transformation Production Frontier
Land for corn
Total land availability frontier
Curvature of the frontier: easiness
of land movement
Relative prices
Psoy/Pcorn
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Land for soybeans

16. So, in a CGE model we have
 A complete specification of the demand side of the economy;
 A complete specification of the supply side of the economy;
 CGE models: have the ability to capture the indirect land use
effect caused by policies in a integrated framework:
 For example, how the fall in trade barriers in USA would affect
land use in Mato Grosso?
 Partial equilibrium models, on the other hand, model spatial
and land management in great detail, since the rest of the
economy is not taken into account.
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17. What about details in CGE models?
 Increasing computer power capacity turned it possible to
work even at a very fine grid cell level, watersheds or Agro
Ecological Zone (AEZ), for example.
 However, the level detail on data is the limitation: modeling
at sub-national level requires estimation of input usage and
production by spatial unit. We typically have it at national
level (IO tables).
 There are many different solutions in the literature, which is
in the frontier of CGE modeling, linked now to the climate
change literature.
 A host of new issues arises from detailed land representation.
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18. Mobility of land across uses at sub-
national level grid
 Why farms do not specialize if land is homogeneous?
 Farms are often diversified. Two main considerations:
 Risk aversion (not a market level phenomenon).
 Non-homogenous land, even at very fine grid level. Some activities on
hills and others on valleys, for example. Substitution not easy.
 One possible solution: again, the CET framework with particular
values for the elasticity of substitution at sub-national level.
 In any case, the land supply function is nested, with decisions at
different levels: first, decide how many land allocate for particular
crops, than distribute this total at sub-national level.
 Thousands of units of analysis? Size wouldn’t be the problem, but
data…..
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19. What about GHG emissions?
 Once the economy is modeled the emissions tracking is
straightforward.
 Emissions either linked to:
 Use of products (fuels, for example)
 Level of activity of producing sectors (CH4 in livestock, for
example).
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20. And what about deforestation?
 A major challenge in modeling, still immature.
 CGE models are good for phenomena which are guided by
prices.
 This is not the case of deforestation as we know it in Brazil.
 A range of non-market variables, like poorly defined
property rights in Amazon and roads constructions, for
example, have a determinant impact on deforestation.
 There are attempts to link CGE models with specific forestry
models. Forestry involve investment decisions, inter-
temporal.
 This is an issue difficult enough even in partial equilibrium.
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21. 25
An illustration: ethanol export expansion in Brazil
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Series1
5
0
-5
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22. An illustration: distributive and poverty effects
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23. Directions for future research in CGE
and LUC in Brazil
 Develop a CGE model of land use with the actual modeling
technology: increase land use representation at sub-national
level.
 Presently models work at state (27 regions) level.
 Work on estimation of parameters for this detailed land use
model: elasticity of substitution between activities:
 Initially by region
 Maybe at sub-national unit level?
 Integration with the general equilibrium framework.
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24. Thank you
 Email: jbsferre@esalq.usp.br
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