DELIVERING THE CIRCULAR ECONOMY A TOOLKIT FOR POLICYMAKERS

DELIVERING THE CIRCULAR ECONOMY – A TOOLKIT FOR POLICYMAKERS • 163
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Economy-wide impact quantification
Economy-wide impact assessment methodology
The economy-wide impact assessment was conducted using NERA Economic
Consulting’s N ew
ERA global model. A multi-sector, multi-region trade, dynamic
computable general equilibrium model. The model uses standard macro and
microeconomic theory to represent the flow of goods and factors of production within
the economy. A simplified version of these interdependent economic flows is shown in
Figure C1. It illustrates the flow of goods, services and payments in a typical CGE set up
between the different economic agents in the domestic and international markets.
Figure C1: Overview of a Computable general equilibrium (CGE) model
Exports
In the model, there is a representative household in each region. Households supply
factors of production, including labour and capital, to firms. In return, firms provide
households with payments for the factors of production. Firm output is produced from
a combination of productive factors and intermediate inputs of goods and services
supplied by other firms. The final output of individual firms can be consumed within
Denmark or exported. The model also accounts for imports into Denmark. Goods and
services in the model are treated as ‘Armington’ goods and services, that is, imported
and domestically produced goods and services are assumed to be only imperfect
substitutes.
In addition to consuming goods and services, households can accumulate savings, which
they provide to firms for investments in new capital. Taxes are collected by a passive
government, which recycles tax receipts back to the households as lump-sum transfers.
Another feature of the CGE framework is that all markets are required to clear, meaning
that the sum of regional products and factors of production must equal their demands,
and that the income of each household must equal its factor endowments plus any net
transfers received. In other words, there can be ‘no free lunches’. The model assumes
general equilibrium, which requires that for all sectors, regions and time periods, there is
a global equilibrium where supply and demand are equated simultaneously, as producers
and households anticipate all future changes. The mechanism by which this is achieved
is through price changes.
To analyse the economic impact of scenarios (e.g. structural change from increased
circularity in the economy), CGE models such as the N ew
ERA model represent the
interactions and feedback effects in the exchange of goods and services simultaneously
between consumers, producers and government and across sectors, regions and time.