Technical improvements to GTEM: Sticky livestock capital and resources costs for land sequestration and abatement technologies

ABARES Working Paper

Published: 1 February 2024

Authors: Linden Whittle and LY Cao

Summary

In 2021, along with numerous other countries, the Australian Government submitted its emissions reduction target to UNFCCC, committing Australia to achieving net zero emissions by 2050.

Computable General Equilibrium (CGE) Models are well suited to assessing the most efficient way to achieve emissions reduction targets and, for this reason, are one of the most appropriate, available tools for analysing climate policies.

However, many CGE models often lack critical features that can significantly affect the analysis of global climate policy, particularly when it comes to the agriculture sector. Some of these include the stickiness of livestock capital and resources costs associated with abatement technologies and land-based carbon sequestration. Failure to include these features in the model can lead to underestimating the economic costs of achieving national emissions reduction targets and inaccurate estimates of the impacts on agricultural industries, economic growth, and food security.

In response to this, this report presents methods for including these features in CGE models to improve analysis of the impacts of climate policies. Sticky livestock capital is implemented by distinguishing between generic capital that is fully mobile across industries and livestock specific capital that is unique to each livestock industry. Abatement resource costs are calculated using existing marginal abatement costs curves and so require minimal changes to model code and no changes to the database. Finally, carbon sequestration resource costs are included by introducing a carbon sequestration industry that uses primarily land as an input along with some uses of labour and capital to generate carbon credits as an output.

This report goes further by demonstrating the importance of including these features in CGE models when assessing the impacts of global action on climate change. This is done by comparing the estimated impacts of a hypothetical global policy using different model specifications.