Climate Policy and the Energy-Water-Food Nexus: A Model Linkage Approach

There is a growing recognition that the ambitious UN Sustainable Development Goals (SDG) to end hunger, achieve food security and promote sustainable agriculture (SDG 2), to ensure universal access to water and sanitation (SDG 6), to ensure universal access to affordable, reliable, sustainable and modern energy (SDG7) and to combat climate change and its impacts (SDG 13) are linked in complex ways. The emerging literature on the energy-water-food nexus highlights the need to take account of the trade-offs and synergies among the goals arising from these linkages, but also underscores the need for further research to understand the quantitative relevance of the various channels through which measures towards the attainment of the goals affect each other. The presence of multiple conceivable pathways to the achievement of the SDGs by 2030 as well as the numerous uncertainties surrounding medium- to long-run projections for the global food system call for a scenario approach to development policy planning, and the development of plausible scenarios needs to be informed by quantitative modelling that captures the key linkages between energy, water, food and climate policy in a stylized form. Dynamic standard global computable general equilibrium (CGE) models are able to capture the input-output linkages between agricultural, food processing and energy sectors and the impacts of population and economic growth on structural change, energy and food demand as well as the impacts of policy interventions, but due to their coarse regional aggregation structure they are not suitable to take account of physical water scarcity constraints in a persuasive manner. In contrast, existing partial equilibrium (PE) multi-market models of global agriculture can incorporate hydrological constraints at detailed regional scales and support a more disaggregated representation of agricultural commodities than CGE models, but fail to take systematic account of linkages between agriculture, energy and the rest of the economy. To capture the advantages of both modelling approaches, the present study links a global dynamic multisector CGE model with a global dynamic PE multi-market model of agricultural supply, demand and trade. The linked modelling framework facilitates a quantitative analysis of the wider implications of agricultural sector scenario projections by taking systematic account of linkages between agriculture and the rest of the economy and allows a rigorous theory-grounded general equilibrium welfare analysis of shocks to agriculture. Conversely, the linked approach supports a detailed analysis of the effects of shocks that initially hit non-agricultural sectors on agricultural variables and water security. In this paper, the approach is used to assess the impact of stylised climate change mitigation scenarios on energy prices, economic growth, food security and water availability. The modeling methodology links the global computable general equilibrium (CGE) model GLOBE-Energy with IFPRI’s International Model for Policy Analysis of Agricultural Commodities and Trade (IMPACT) version 3. IMPACT3 is a modular integrated assessment model, linking information from climate models, crop simulation models and water models to a global partial equilibrium multi-market model of the agriculture sector. IMPACT3 has been designed to support longer-term scenario analysis through the integration of these multidisciplinary modules to provide researchers and policymakers with a flexible tool to assess and compare the potential effects of changes in biophysical systems, socioeconomic trends, agricultural technologies, and policies. The core multimarket model simulates food supply and demand for 159 countries. Agricultural production is further disaggregated to include 320 food production units (FPUs), which are intersections of river basins and national boundaries, that is, an intersection of 154 river basins with 159 economic regions. The multimarket model simulates 62 agricultural commodity markets, covering all key food as well as key non-food crops, such as cotton. The water models in IMPACT3 include a global hydrology model (IGHM) that simulates snow accumulation and melt and rainfall-runoff processes at 0.5-degree latitude by 0.5-degree longitude resolution, a water basin supply and demand model (IWSM) that operates at the FPU level, and the IMPACT crop water allocation and stress model that estimates the impact of water shortages on crop yields, also at the FPU level. These three modules allow for an assessment of climate variability and change on water availability for the agriculture and other sectors, as well as for an assessment of changes in water demand, investment in water storage and irrigation infrastructure, and technological improvements on water and food security. In particular, the IGHM model simulates natural hydrological processes, thus estimating water availability, while the IWSM model simulates human appropriation of surface water and groundwater, considering water infrastructure capacity and policies, based on which we water stress calculations. The model can also simulate impact of changes in fertilizer prices on food supply and changes in energy prices on the demand for hydropower development and on groundwater pumping. GLOBE-Energy is a recursive-dynamic multi-region CGE model which features a detailed representation of the technical substitution possibilities in the power sector. The model is initially calibrated to the GTAP 8.1 database which represents the global economy-wide structure of production, demand and international trade at a regionally and sectorally disaggregated level for the benchmark year 2007. The model version employed in the present study distinguishes 24 commodity groups and production sectors, and 15 geographical regions. In the development of a dynamic baseline for the present study, the growth rates of labor-augmenting technical progress by region are calibrated such that the regional baseline GDP growth rates replicate the GDP growth assumed in the IMPACT baseline projections. Moreover, for agricultural commodities, the sectoral total factor productivity parameters are calibrated such that the baseline producer price paths are consistent with the corresponding aggregated IMPACT producer price projections. To ensure that the baseline projections for agricultural quantity variables generated by GLOBE are broadly in line with the corresponding aggregated IMPACT projections as well, the parameters of the household consumer demand system are calibrated to be consistent with the aggregated household income elasticities of demand for the matched food commodity groups assumed in IMPACT. The aggregate real income effects and changes in fertilier prices associated with energy-related climate change mitigation measures generated by GLOBE are then downscaled to the IMPACT regional aggregation level and passed back to IMPACT to analyse the detailed implications for agricultural variables, water and food security. The simulation analysis compares a baseline scenario using SSP2 (Shared Socio-Economic Pathway 2 – aka “middle of the road”) assumptions about population and GDP growth and no changes in fossil fuel taxes, with a stylized mitigation scenario. This mitigation scenario assumes a gradual linear phasing-in of additional taxes on the use of primary fossil fuels globally from 2016 onwards up to 2050 on top of baseline taxes such that the additional ad valorem tax wedges between producer and user prices reach 70, 50 and 30 percent for coal, crude oil and natural gas respectively by 2050. The resulting user price increases for the primary fossil fuels and refined petrol induce substitution effects towards renewable energy sources in production along with investments in more energy-efficient technologies as well as substitution effects towards less energy-intensive goods in final consumption. As a consequence, the demand for fossil fuels drops relative to the baseline and the producer prices for coal, crude oil and natural gas fall significantly, while the producer prices of refined petrol rise due to the increase in crude oil input costs. From a macroeconomic perspective, these price shifts entail terms-of-trade gains for regions that are net importers of the primary fossil fuels and corresponding terms-of-trade losses for the net importers of these fuels. Correspondingly, the aggregate real income reductions under this scenario are moderate to small for the net importing regions but more pronounced for the net exporters of primary fossil fuels. The provisional simulation results suggest only moderate indirect effects on agricultural prices and food security outcomes. While higher prices for chemical fertilizers and reduced groundwater pumping due to higher energy costs per se push crop prices up to some extent, the adverse real income effect on food demand pull crop prices in the opposite direction. The price effects are slightly more pronounced when the energy price increases are assumed to induce a significant increase in first-generation biofuel production relative to IMPACT baseline assumptions.