Incorporating CO2 Emissions into Macroeconomic Models through Primary Energy Use

Two key pillars of the energy quadrilemma (which measure the sustainability of energy policy) are a reduction in greenhouse gas emissions and economic development. Recent worldwide energy policy has focused on the reduction of greenhouse gas emissions to combat climate change, which will influence, and in turn be influenced by, economic activity and energy use. As such, it is of critically important to identify and incorporate emissions into macroeconomic models. Typically, emissions are linked to economic activity via the level of output, both calculated at a sectoral level. However, this approach – while consistent with linear models such as Input-Output - assumes that emissions per unit of output remains constant, which can be problematic with more complex economic systems. In this paper we detail a method for incorporating sectoral and aggregate CO2 emissions into a macroeconomic model (CGE) of the UK through the use of sectoral primary energy use.