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GEM-E3(General Equilibrium Model for Energy-Economy-Environment interactions) is a computable general equilibrium model that provides details on the macro-economy and its interactions with the environment and the energy system. It is an empirical, large-scale model, written entirely in structural form. The model computes the equilibrium prices of goods, services, labour, and capital that simultaneously clear all markets under the Walras' law. In brief, the model can be characterised as follows:

  • It is a multi-country model, treating separately each region and linking them through endogenous trade of goods and services
  • It includes multiple industrial sectors and economic agents, allowing the consistent evaluation of distributional effects of policies.
  • It is a multi-period model, involving dynamics of capital accumulation and technological progress, stock and flow relationships and backward looking expectations.[1]


In addition, the model covers the major aspects of public finance including all substantial taxes, social policy subsidies, public expenditures and deficit financing, as well as policy instruments specific for the environment/energy system.

The model determines the optimum balance of energy demand and supply, atmospheric emissions and pollutant abatement, simultaneously with the optimising behaviour of agents and the fulfilment of the overall equilibrium conditions. In this sense, the model analyses the interactions between the economy, the energy and the environment systems.

The results of GEM-E3 include projections of full input-output tables by country, national accounts, employment, and capital flows, balance of payments, public finance and revenues, household consumption, energy use and supply, and atmospheric emissions. The computation of equilibrium is simultaneous for all regions covered by the model and foreign trade links.

A major achievement of GEM-E3 in supporting policy analysis is the consistent evaluation of distributional effects across countries, economic sectors and agents. The burden sharing aspect of energy supply and environmental protection are fully analysed, while ensuring that the economy remains at a general equilibrium condition.[1]

Typical Model Applications:

  • Simulation of the effects of market-based instruments for energy-related environmental policy on key economic and environmental indicators
  • Evaluation of European Commission programmes that aim at enabling new and sustainable economic growth
  • Burden-sharing analysis
  • Public finance, stabilisation policies and their implications on trade, growth and the behaviour of economic agents[1]

Sectoral coverage:

GEM-E3-World: 18 products and sectors

(1) Agriculture, (2) Coal, (3) Petroleum Refineries, (4) Distribution of Gaseous Fuels - Manufacture of Gas, (5) Electricity, (6) Ferrous and Non Ferrous Metals, (7) Chemical Products, (8) Other Energy Intensive Industries, (9) Electronic Equipment, (10) Transport Equipment, (11) Other Equipment Goods, (12) Other Manufacturing Products, (13) Construction, (14) Food Industry, (15) Trade and Transport, (16) Textile Industry, (17) Other Market Services, (18) Non Market Services

GEM-E3-Europe: 18 products and sectors

(1) Agriculture, (2) Coal, (3) Oil, (4) Natural Gas, (5) Electricity, (6) Ferrous and Non Ferrous Metals, (7) Chemical Products, (8) Other Energy-Intensive Industries, (9) Electrical Goods, (10) Transport Equipment, (11) Other Equipment Goods Industries, (12) Consumer Goods Industries, (13) Building and Construction, (14) Telecommunication Services, (15) Transport, (16) Services of Credit and Insurance, (17) Other Market Services, (18) Non Market Services[1]

Consumption categories:

GEM-E3-Europe and GEM-E3-World: 11 non-durable goods:

(1) Food, Beverages and Tobacco, (2) Clothing and Footwear, (3) Housing and Water, (4) Fuels and Power, (5) Housing Furniture and Operation, (7) Medical Care and Health Expenses, (9) Operation of Transport and Equipment, (10) Purchased Transport, (11) Telecommunication Services, (12) Recreation, Entertainment, Culture, etc., (13) Other Services

GEM-E3-Europe and GEM-E3-World: 2 durable goods:

(6) Heating and Cooking Appliances, (8) Transport Equipment[1]

Behavioural assumptions:

  • Households: Consumption expenditure and supply of labour result from the process of the intertemporal utility maximisation of the representative household under the intertemporal restriction of its income. At the first stage, total consumption expenditure and leisure (and thus aggregate savings and the supply of labour) are determined using the steady-state formulation of the above maximisation problem. At the second stage, a static utility function is maximised and total consumption expenditures are allocated to consumption categories. Consumption demands are translated into demands for products by using a consumption matrix.
  • Firms: Each sector is assumed to consist of an infinite number of firms that produce a homogenous good under perfect competition, following a constant return to scale technology with a four-level nested constant elasticity of substitution specification. Each producer maximises his profit and generates his factor demands for production, including demands for capital and labour (primary factors) and the demands for products and services, provided by production sectors. The quantity of each production factor is the result of supply and demand. The supply of physical capital is fixed for a specific time period within a sector; producers, however, can vary the capital stock through time by investments (quasi-fixed capital stock that is immobile between sectors and countries). Investment decisions depend on the quantity of existing capital in the current period and the desired quantity of capital which is determined during the profit maximisation process, taking into account the long-run rate of return on capital.[1]

Energy-environment model:

The environmental module computes the emissions, their transportation over the different EU countries and the monetary evaluation of damages caused by emissions and depositions. The primary pollutants are related to the use of energy sources, the rate of abatement, the share of energy use of the demand of fossil fuel and the emission coefficient of a pollutant.

The effects of different policy instruments on the behaviour of firms and households are considered via three mechanisms of emission reduction: end-of-pipe abatement, substitution between fuels and/or energy and non-energy inputs, and emissions reduction caused by sectoral and/or consumption restructuring.[1]

Government behaviour:

Government expenditure (exogenously given spending pattern):

  • Government consumption
  • Public investment
  • Transfers to households (social benefits)
  • Product and export subsidies
  • Foreign sector transfers

Government revenue:

  • Labour income taxes and social security contributions
  • Indirect taxes
  • Energy and environmental taxes
  • Value-added taxes
  • Property taxes
  • Capital taxes
  • Import duties
  • Revenues from government enterprises[1]

Dynamic structure:

  • recursively dynamic with backward looking (myopic) expectations
  • Periods of time are linked through adjustment processes of capital stocks and stocks of durable goods
  • Exogenous technical progress (neutral or factor-augmenting)

Linkage between regions and countries:

GEM-E3 can be used either in the single-country version where the rest of the world is an aggregate of all other countries/regions or the multi-country version where individual countries are linked by endogenous (price dependent) bilateral trade flows or trade pools.

Regarding aggregate demand for products, GEM-E3 uses a two-level nested Armington specification. At a first stage, domestic demand is allocated to imports and domestically produced goods (domestic buyer minimise the cost of the composite good); at a second stage, imported goods are distinguished depending on their country of origin.

The demand for exports is defined as the sum of the demand for imports of all other countries/regions for the goods of one country.

The current account of each country/region can be either fixed (then the long-run rate of capital is endogenous) or be kept variable (the long-run rate of capital is exogenous)[1]

Market Structure:

Product market:

  • Perfect competition

Labour market:

  • Neoclassical labour market without involuntary unemployment or imperfect competition by introducing a wage curve[1]

Main Model Results:

Macro economic results:

  • GDP, production, investment, final and intermediate consumption, external trade: full trade matrix for EU-14 and rest of the world (GEM-E3-Europe) or for the whole World by region (GEM-E3-World), trade balance, relative prices, employment, primary factor income and transfers in the form of a Social Accounting Matrix, tax incidence and revenues, labour productivity

Sectoral economic results:

  • Production, value added, investment, final and intermediate consumption, exports, imports, relative prices, employment

Environment-related results:

  • Energy production, final and intermediate energy consumption by category, energy prices, atmospheric emissions (GEM-E3-Europe: CO2, SO2, NOx, VOC, particulates, tropospheric ozone; GEM-E3-World: CO2, GHGs), pollution abatement capital, purchase of pollution permits, damages (to public health, territorial ecosystem, materials, global warming)[1]

Required technical infrastructure:

The model is formulated and solved as mixed complementarity problem (MCP) within the GAMS mathematical modelling language. The complementarity problem is solved in GAMS using PATH.

Structure of Input Data:

Exogenous variables and parameters:

  • Variables that can be adjusted for the purpose of policy analysis (e.g. tax rate, emission reduction targets)
  • Investment and consumption matrix per country/region, emission based coefficients, end-of-pipe abatement cost functions, etc.
  • Coefficients of the behavioural (utility and cost) functions, e.g. substitution elasticities in production function or Armington elasticities (taken from economic literature and own econometric estimations)[1]

Base year data:

  • Base year data: Country- or region-specific "Social Accounting Matrices" (SAM) including national accounts and input-output data, bilateral trade matrices (data sources: EUROSTAT, GTAP data base; base year 1995).


  • The calibration method is used in order to determine level parameters that, in the base case, exactly reproduce the pre-determined data set
  • The forward calibration of the benchmark economies to the target year is based on assumptions about technical progress, the national public policies, GDP growth, energy demand and future energy prices (the latter e.g. derived from POLES scenario)

Model Extensions:

GEM-E3-ELITE: Endogenising technological progress[1]

Links to other Models, Projects, Networks:

Extern E: delivered inputs for the environment module, such as damage data and their monetary valuation

POLES: provides projections on world and EU growth and world energy prices for the reference scenario

EMEP: provides transport deposition coefficients for SO2 and NOx emissions

Regional Scope:

GEM-E3-Europe: EU-24 countries (EU-27 without Cyprus, Malta, and Luxembourg)

GEM-E3-World: 18 inter-linked world country/region modules involving the USA, China, India, Japan, Australia and New Zealand, the Former Soviet Union, etc.

See also


  1. 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 JRC European Commission, IA Tools, supporting impact assessement in the European Commission [1].

Böhringer, C. et al. (2000), European Emission Mitigation Policy and Technological Evolution: Economic Evaluation with the GEM-E3-EG Model (GEM-E3-ELITE, Final Report to the EC, Contract No. JOS3-Ct97-0017).

European Commission (1995), Computable General Equilibrium Model for studying Economy-Energy-Environment Interactions, GEM-E3, DG XII, EUR 16714, Brussels.

Capros et al. (1997), The GEM-E3 Model: Reference Manual (detailed technical documentation of the Model).

Capros et al. (1999), Climate Technology Strategies 2 - The Macro-Economic Cost and Benefit of Reducing Greenhouse Gas Emissions in the European Union, Physica, Heidelberg, ISBN 3-7908-1230-7.

References related to GEM-E3-World

Kouvaritakis, N. et al. (2004), Trade Liberalisation and Climate Policies, in: Böhringer, C., Löschel, A. (eds.), Climate Change Policy and Global Trade, ZEW Economic Studies 26, Physica, Heidelberg.