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Modelling the regional economic impacts of energy development - Mentzas

Mentzas et al. (1987) surveyed models for assessing the regional economic impacts of energy development. They discussed three main approaches: economic base models, which estimate employment effects; input-output models, which analyze industry interdependencies; and econometric models, which allow for forecasting and policy analysis but require significant regional data. The authors concluded that accurate regional impact assessments require integrating accounting techniques, environmental impacts, all relevant impact dimensions, and adaptability to different regions and their data availability.

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SUMMARY Modelling the regional economic impacts of energy development: a survey
Mentzas et al. (1987)


Mentzas et al. (1987) performed a survey on models of economic impacts of energy
developments. Even though their work passed unnoticed in literature, it provides some
fundamentals of the energy and economic development relationships “at a regional level (also
extrapolatable to country level)”.

Energy decentralization is generally included in the context of sustainable development. In this
respect regional development plans should be integrated with “accurate and timely economic
impact projections of energy development”.

In order to understand the role of energy impact on the economy, two type of studies are
needed: “Energy-economy interdependencies and Regional impact assessment of resource
development, which in the best sense they must be integrated. (Major topics: energy demand
and supply balance, production and trade patterns of the system, demographic evolution,
price, fiscal and social service systems/institutions)”

Energy economic impact studies can be classified according to two criteria: 1) Relationship
understanding for overall planning process Studies “ in relation to the use in the overall
planning process” and 2) To what extent using modelling techniques in relation to the degree
to which studies incorporate modeling procedures.

1st                                             2nd
Normative (what’s ought to be [if…])            qualitative
Descriptive/Positive (what it is)               quantitative-empirical
Informative (not correct)                       incomplete models
                                                integrated models

Regio-economic impacts

 1st Assumptions: Openness. In finance, labor and population exchange, trading inter-intra-
country. The regional system should be treated separately and not as a national sytem.

2nd assumption. The exploitation of energy resources is seen as an “exogenous disturbance”
to the economic system. Energy = exogenous disturbance that contributes to transform but
doesn't provide structural change. In turn, the affected variables by the disturbance are labor
force-materials construction, energy supply patterns/prices, energy demand??, substitution
between different energy sources… “This disturbance does not cause any substitution between
energy and the other production factors”

Economic implications

     Primary    effects refer to the material and labor requirements          directly
      connected to the advent of the primary energy facility;
     Direct     effects   deal with the changes        in regional production     and
      employment      occurring as a result of the local procurement    of the energy
      facility;
     indirect effects take into account the inter-industry effects generated     from
      the increase in local purchases of the primary and its supplier facilities.
      these effects might have a static or dynamic nature. In the latter case, they
also consider changes in fixed capital formation,        due to changes in
      the demand of goods.
     induced effects refer to the production    and labour required in order to
      meet the demand       for goods and services associated     to the increased
      earnings connected   with the previous      effects. In some studies, price-
      induced impacts are also included (if prices are explicitly considered).

  The combined effects are usually join in the Total Multiplier Effect, which estimates “the
  effects of a change in spending in one part of the economy, on total economic
  activity in a region.
      displacement     effects refer to the existence of upper financial limits (e.g. a
      displacement effect on employment could take place if an energy choice
      reduces the labor requirements          associated     with an alternative      energy
      form);
   respending effects take place as energy cost savings are respent; while,
   substitution effects occur when funds are diverted to energy expenditures.




Exceptions and items not considered. Structural changes are not included in the impacts above

Methodological approaches

Techniques to evaluate energy impacts are used to satisfy the need of regional structure
descriptions, forecasting and policy analysis. Three namely the economic base, the input-output
and the econometric models have been widely used for estimating the regional economic
impacts of energy development

Economic based models
Regional economic activity is divided into basic and no-basic sector. The basic sector produces
goods for export out of the region and the non-basic one produces goods for local
consumption. The objective is to determine the effects on employment, i.e. Energy is a
development employment-driven disturbance. The model can be used for stimulating the
impacts of energy development when direct employment effects of energy projects are
aggregated to the basic sector. The allocation of employment between the two sectors is a
problem of the model. Disadvantages are assumptions of ewual productivity of sectors, just
the aggregate effect is known, and Dependent entirely on multipliers

Regional input and output models
These models are based upon a quantitative analysis of the interdependencies between the
region’s industries as suppliers of inputs and purcharsers of products. Two ways in which the
impact is evaluated: Disturbance in terms of final demand and New variables for input-output
tables are needed (latter… 1st approach-Includes material for energy projects and requirement
of intermediate goods… 2nd approach Energy sectors as industrial sectors of the input-output
matrix and determines the final demand exogenously)[if used with dynamic i-o model, Not
always it has an answer and Very expensive method and requires specific data]. PROBLEM Has
led analysts to numerous attempts to approximate the regional inter-industry relationships by
adjusting the coefficients already available for larger areas or the country as a whole.
Fortunately, it provides an acceptable framework to pass form technic economic data to
macroeconomic view

Econometric modeling
 At a regional level, not mature, yet interesting. Advantages such as forecasting capabilities
and policy-analytic attributes and they do not employ a large number of assumptions as other
models do. Most advantage… Econometrics gives a consistent framework. It implies two main
difficulties for the analyst: 1) Scarcity of regional data which may lead to simple model
structures 2)not enough information about the linkages of energy and the other
sectors/activities. Econometric models is that although they are overall suitable in providing a
framework for simulating various regional growth paths, however they are relatively ineffective
in assessing the impacts of specific energy projects

To every model…
Subjective impact dimensions should be included. An integration of various impact dimensions
should be inherent in impact assessment (Pop growth vs secundary impacts scope in crucial,
Public service, Fiscal impact, Social often not taken into account)

 CONCLUSIONS
1st directionLinking accounting techniques
2nd  Environmental Impact Assessment
3rd  Integration , Accurate formulation and the adequate integration of all the impact
dimensions
4th Adaptability. The construction of a generalized framework of data needs which will in
turn provide sound prescriptions for the establishment of well-defined regional energy and
economic data bases



MENTZAS, G., CAPROS, P. & SAMOUILIDIS, I. E. 1987. Modelling the regional economic impacts
      of energy development: a survey. Socio-Economic Planning Sciences, 21, 151-158.

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Modelling the regional economic impacts of energy development - Mentzas

  • 1. SUMMARY Modelling the regional economic impacts of energy development: a survey Mentzas et al. (1987) Mentzas et al. (1987) performed a survey on models of economic impacts of energy developments. Even though their work passed unnoticed in literature, it provides some fundamentals of the energy and economic development relationships “at a regional level (also extrapolatable to country level)”. Energy decentralization is generally included in the context of sustainable development. In this respect regional development plans should be integrated with “accurate and timely economic impact projections of energy development”. In order to understand the role of energy impact on the economy, two type of studies are needed: “Energy-economy interdependencies and Regional impact assessment of resource development, which in the best sense they must be integrated. (Major topics: energy demand and supply balance, production and trade patterns of the system, demographic evolution, price, fiscal and social service systems/institutions)” Energy economic impact studies can be classified according to two criteria: 1) Relationship understanding for overall planning process Studies “ in relation to the use in the overall planning process” and 2) To what extent using modelling techniques in relation to the degree to which studies incorporate modeling procedures. 1st 2nd Normative (what’s ought to be [if…]) qualitative Descriptive/Positive (what it is) quantitative-empirical Informative (not correct) incomplete models integrated models Regio-economic impacts 1st Assumptions: Openness. In finance, labor and population exchange, trading inter-intra- country. The regional system should be treated separately and not as a national sytem. 2nd assumption. The exploitation of energy resources is seen as an “exogenous disturbance” to the economic system. Energy = exogenous disturbance that contributes to transform but doesn't provide structural change. In turn, the affected variables by the disturbance are labor force-materials construction, energy supply patterns/prices, energy demand??, substitution between different energy sources… “This disturbance does not cause any substitution between energy and the other production factors” Economic implications  Primary effects refer to the material and labor requirements directly connected to the advent of the primary energy facility;  Direct effects deal with the changes in regional production and employment occurring as a result of the local procurement of the energy facility;  indirect effects take into account the inter-industry effects generated from the increase in local purchases of the primary and its supplier facilities. these effects might have a static or dynamic nature. In the latter case, they
  • 2. also consider changes in fixed capital formation, due to changes in the demand of goods.  induced effects refer to the production and labour required in order to meet the demand for goods and services associated to the increased earnings connected with the previous effects. In some studies, price- induced impacts are also included (if prices are explicitly considered). The combined effects are usually join in the Total Multiplier Effect, which estimates “the effects of a change in spending in one part of the economy, on total economic activity in a region.  displacement effects refer to the existence of upper financial limits (e.g. a displacement effect on employment could take place if an energy choice reduces the labor requirements associated with an alternative energy form);  respending effects take place as energy cost savings are respent; while,  substitution effects occur when funds are diverted to energy expenditures. Exceptions and items not considered. Structural changes are not included in the impacts above Methodological approaches Techniques to evaluate energy impacts are used to satisfy the need of regional structure descriptions, forecasting and policy analysis. Three namely the economic base, the input-output and the econometric models have been widely used for estimating the regional economic impacts of energy development Economic based models Regional economic activity is divided into basic and no-basic sector. The basic sector produces goods for export out of the region and the non-basic one produces goods for local consumption. The objective is to determine the effects on employment, i.e. Energy is a development employment-driven disturbance. The model can be used for stimulating the impacts of energy development when direct employment effects of energy projects are aggregated to the basic sector. The allocation of employment between the two sectors is a problem of the model. Disadvantages are assumptions of ewual productivity of sectors, just the aggregate effect is known, and Dependent entirely on multipliers Regional input and output models These models are based upon a quantitative analysis of the interdependencies between the region’s industries as suppliers of inputs and purcharsers of products. Two ways in which the
  • 3. impact is evaluated: Disturbance in terms of final demand and New variables for input-output tables are needed (latter… 1st approach-Includes material for energy projects and requirement of intermediate goods… 2nd approach Energy sectors as industrial sectors of the input-output matrix and determines the final demand exogenously)[if used with dynamic i-o model, Not always it has an answer and Very expensive method and requires specific data]. PROBLEM Has led analysts to numerous attempts to approximate the regional inter-industry relationships by adjusting the coefficients already available for larger areas or the country as a whole. Fortunately, it provides an acceptable framework to pass form technic economic data to macroeconomic view Econometric modeling At a regional level, not mature, yet interesting. Advantages such as forecasting capabilities and policy-analytic attributes and they do not employ a large number of assumptions as other models do. Most advantage… Econometrics gives a consistent framework. It implies two main difficulties for the analyst: 1) Scarcity of regional data which may lead to simple model structures 2)not enough information about the linkages of energy and the other sectors/activities. Econometric models is that although they are overall suitable in providing a framework for simulating various regional growth paths, however they are relatively ineffective in assessing the impacts of specific energy projects To every model… Subjective impact dimensions should be included. An integration of various impact dimensions should be inherent in impact assessment (Pop growth vs secundary impacts scope in crucial, Public service, Fiscal impact, Social often not taken into account) CONCLUSIONS 1st directionLinking accounting techniques 2nd  Environmental Impact Assessment 3rd  Integration , Accurate formulation and the adequate integration of all the impact dimensions 4th Adaptability. The construction of a generalized framework of data needs which will in turn provide sound prescriptions for the establishment of well-defined regional energy and economic data bases MENTZAS, G., CAPROS, P. & SAMOUILIDIS, I. E. 1987. Modelling the regional economic impacts of energy development: a survey. Socio-Economic Planning Sciences, 21, 151-158.