External Economic Effects of the Development of Energy Sector: Evaluation Methodologies and their Application

Vidas Lekavicius, Arvydas Galinis


The main purpose of this paper is to establish a theoretical framework for quantitative evaluation of economic externalities (impacts on employment, current account balance, etc.) that are caused by the development of energy sector. These externalities fail to impact the competitiveness of a particular energy enterprise directly, but they may influence the socioeconomic indicators as well as the competitiveness of a country or region. The choice of the methodology for quantitative evaluation of external economic effects depends on the scope of analysis and resources available. Calculation of direct external economic effects is the least complicated approach that can provide some insights about the impacts and their direction in the close environment of the power plant or other energy technology.  However, this approach fails to depict full variety and scale of possible impacts, including indirect and induced effects. Among more comprehensive approaches, input-output analysis and computable general equilibrium (CGE) modelling are of highest popularity in the field, econometric analyses being less useful in ex-ante analyses. The most policy-relevant results can be obtained when careful calculation of directs impacts is coupled with CGE modelling which allows for realistic representation of inter-sectorial linkages and capturing of induced effects in equilibrium (thus, considering many rounds of the impacts).The main drawbacks of CGE modelling are the sensitivity to the assumptions, and high initial cost of application.


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