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

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 how much 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?

References Kilian, L. (2008). "The Economic Effects of Energy Price Shocks." Journal of Economic Literature 46(4): Welsch, H. (2008). "Armington elasticities for energy policy modeling: Evidence from four European countries." Energy Economics 30(5):