STREAM: Substance Throughput Related to Economic Activity Model; a partial equilibrium model for material flows in the economy
Material use in OECD remains high in absence of new environmental policy
Therefore, the reduction of material related emissions can only be achieved with large efforts. Halving material use is regarded by many experts as a necessary condition for achieving a sustainable economy. Current environmental policies are insufficient to meet this condition. Moreover, national environmental policies are not much geared to one another. Non-concerted tax measures to reduce material use or process emissions in the material industries mainly lead to relocation of these industries to other countries. However, the displacement effect of non-concerted taxation may be strongly reduced if the tax is only imposed on material use or emissions that can be avoided at reasonable costs.
Hein Mannaerts of CPB Netherlands Bureau for Economic Policy Analysis comes to these conclusions in Research Memorandum 165, STREAM, a partial equilibrium model for material flows in the economy. This memorandum presents a detailed description of a new economic model that CPB has developed in cooperation with RIVM, the National Institute for Public Health and the Environment.
The model is aimed at the analysis of environmental problems related to material flows in the economy. It describes the production, use, recycling and trade of steel, aluminium, plastic, paper, ammonia, phosphate and potassium in the Netherlands and in Western Europe.
Model applications and simulations of historical material flows illustrate the economic mechanisms. The model provides CPB and RIVM with a consistent framework to develop material scenarios and with a tool to analyse the economic effects of various material related environmental policies.
Read also the accompanying press release.
These activities are related to each other by supply and demand of producers and consumers for products, materials and scrap. Supply and demand forces determine the market prices and material flows.
The model includes simple forms of forward cost linkages and backward demand linkages and it encompasses three substitution mechanisms: input substitution, material substitution and spatial substitution. The model provides a consistent framework for material scenarios and related environmental policy analysis for Western-Europe and the Netherlands within an global economic context. The empirical validation of the model is based on time-series and on technical coefficients derived from literature. The empirical investigation increased our knowledge about predominant economic factors, mechanisms and parameters that determine the material flows, especially in the field of:
- Dematerialisation trends and the relation to GDP, energy prices and the material price.
- Recycling trends and the relation to the prices of scrap, energy and virgin materials.
- Input substitution in material production and the relation to energy demand.
- Market and cost prices of raw materials, materials and scrap.
- The sensitivity of West-European and Dutch trade flows to price differences with foreign competitors.
This paper also presents a baseline scenario for materials until 2020, two economic variants and three environmental policy variants for Western Europe and the Netherlands each to illustrate the applicability of the model in scenario and policy analysis. Featuring the historical economic and social trends and mechanisms, future demand for most materials increases very modestly. Taking into account a considerable energy productivity gain, energy demand remains more or less constant. Plastic is a clear exception: plastic demand remains in line with economic growth and plastic industry only gains a small energy productivity increase due to the large share of feedstock demand. The policy variants show among other things that an internationally non-concerted energy price policy that increases the marginal energy costs and leaves the average energy costs unaffected may have a substantially lower international displacement effect than a uniform energy tax. Consequently, only a fraction of the domestic and foreign consumers shift their demand from energy efficient domestic producers to less efficient but cheaper foreign producers.
The policy variants show among other things that in an open economy a unilateral efficient regulatory policy is more effective than a unilateral price policy.