Modelling income inequality and energy poverty Sample Clauses

Modelling income inequality and energy poverty. CGE and macro-econometric models, enhanced with a representation of different socio-economic groups (e.g. income classes) can be used to evaluate the distributional implications of climate policies. The representation of different households and labour types determines the level of detail in inequality analysis. For instance, disaggregation by skill group, gender, age and income class are relevant for distributional analysis about income and consumption. Introducing heterogeneity in models is challenging due the complex interlinkage between growth and inequality [45]. The introduction of additional households enhances the capability of conventional macro-economic models to assess income distribution effects [46] and can be implemented through the simulation of multiple households (e.g. based on income or occupation) or via micro-simulation where labour supply is modelled at the lowest possible aggregation level. Conventional CGE models represent one “representative” household, which aggregates all households of the region and is assumed to maximize its utility according to its consumption preferences. For example, the conventional GEM-E3 model version assumes that households maximise their welfare and choose the optimal allocation of consumption to different purposes. Welfare maximization is derived from the decision for education so as to maximise intertemporal income, the decision of income allocation between consumption and savings, and finally the decision on allocating the consumption over different consumption categories. The model features a distinction between durable and disposable goods and services, allowing also for “linked” consumption of disposable goods (e.g. fuels) for the operation of certain durable goods (e.g. vehicles). In the model, the disposable income is formulated by the earnings from labour and capital ownership after taxes and by other income sources (e.g. social benefits). The household decides on the allocation of its consumption over different consumption categories (COICOP) by maximising a Linear Expenditure demand system subject to its disposable income not used for obliged consumption (subsistence minima consumption). The representation of multiple households in applied CGE modelling has been long established [47, 48, 49] but it is usually constrained by data availability. There are different ways to differentiate households, but income class is the most relevant for distributional analysis. The main caveat of this approach...