WorldScan

WorldScan is a multi-region, multi-sector, applied general equilibrium (AGE) model, which focuses on long-term growth and trade in the world economy. The model is based on the neoclassical theories of growth and trade. The theory and structure of AGE models are discussed in Starr (1997), Ginsburgh and Keijzer (1997), Shoven and Whalley (1992) and Francois and Reinert (1997).

An extensive description of the core version of WorldScan can be found in CPB (1999). Because the emission of CO2, the most important greenhouse gas, is directly related to the use of fossil fuels (coal, oil and gas), energy is one of the main linkages between the economy and the environment / climate. The energy version of WorldScan is an extension of the core version with a detailed modelling of the energy sector. It is designed to analyze climate change policies, particularly those on CO2-abatement policies.

WorldScan distinguishes 12 world regions, and 11 sectors, including 4 for energy-supply (coal, oil, gas and electricity) which allows for substitution between different energy carriers. The distinction among industrialized countries, countries in transition (Annex B) and less industrialized countries (non-Annex B) is particularly relevant for the analysis of climate change policy.

Regions in WorldScan Annex B countries Non-Annex B countries OECD countries Asia United States China Western Europe Dynamic Asian Economies Japan India and Rest of the World Rest of OECD Rest of the world Eastern Europe and Former Soviet Union Middle East and North Africa Eastern Europe Subsaharan Africa Former Soviet Union Latin America
Sectors in WorldScan Materials Agriculture and foodstuffs Energy-intensive goods Consumption goods Capital goods and durables Domestic services International services and transport Other raw materials	Energy carriers in WorldScan Coal Oil and petroleum products Natural gas Electricity

WorldScan uses demand, production, trade patterns, labour and capital intensity of the various sectors, and volumes and prices of energy from the GTAP4E data (McDougall et al, 1998). The calibration year is 1995. The model is run in 5-year steps to keep computing time within reasonable limits.

Within the IMAGE framework, WorldScan generates key economic variables used in the energy model TIMER, the emission model of TIMER and the terrestrial environment system (TES). The relevant input and output variables of WorldScan include:

input	Population age cohorts
output	Regional gross domestic product (GDP) Value added for industry, services and agriculture sectors

WorldScan contains four characteristic elements to describe long-term developments:

1. The Armington trade specification, which includes elasticities describing the preference for consumption of domestically over internationally produced goods. WorldScan assumes a low short-term and higher long-term Armington elasticity, emphasizing the Law-of-one price in the long run (see scenario assumptions - economy).
2. A low-productivity sector in less-industrialized countries. During the process of economic development labour is reallocated from the traditional low-productivity sector to the modern, high productivity sectors.
3. Consumption patterns are not constant in time. The consumption patterns in less-industrialized regions converge towards those in leading regions. As income per capita rises, consumers spend relatively more on services and less on food.
4. Low and high-skilled labour. This distinction allows for a better description of specialization patterns. OECD countries with much high-skilled labour specialize in the production of skill-intensive goods, while non-OECD countries relatively abundant in low-skilled labour specialize in skill-extensive goods.

The behaviour of consumers, firms, informal sector, and labour and capital markets are briefly described below:

• Consumers maximize their lifetime utility, a factor dependent on their consumption in both current and future periods. A consumer's budget consists of accumulated financial and human wealth, defined as the discounted value of future income flows. Besides income from labour these flows include government transfers and surplus profits (which originate from monopoly power). Given total consumption, consumers allocate their expenditures on various goods on the basis of their preferences. Consumer preferences will converge towards those in leading regions along with the increasing per capita consumption. Total demand for a good within a country is the aggregate of consumer demand, intermediary demand and investment demand. Goods can be bought within or outside the region considered. The demand for a specific variety of a good in a certain region depends on the preferences for that variety, its price compared to the average price of the other varieties and total demand for that good.
• Firms maximize their profits on the basis of total demand and by minimizing the costs of the required inputs. These inputs include capital, which is bought in the current period, and other inputs, purchased in the next period. Capital consists of capital goods and construction activities (included in the services sector). Other inputs include low- and high-skilled labour, and all intermediary inputs. Producers derive investment demand as the difference between the volume of the capital stock required minus the depreciated volume of the capital stock from the previous period. Because each region produces its own unique variety of a good, these varieties are imperfect substitutes. The market structure reflects imperfect competition. Producers derive their prices on the basis of profit maximization. The producer price is the unit cost price times a mark-up, which is dependent on the degree of substitutability on each market. The consumer prices are equal to the producer prices within a region. For trade, the consumer price is the producer price from the exporting region plus import and export taxes, and transport.
• Supply of high- and low-skilled workers is exogenous. In OECD regions, exogenous natural unemployment rates are assumed for both skill levels. For non-OECD regions unemployment rates for high-skilled workers are exogenous; those for low-skilled workers are endogenous and much higher than in OECD regions, because low-skilled workers have no access to the formal labour market and work in the low-productivity sector. The allocation of low-skilled workers between low- and high-productivity sectors depends on the ratio of low-skilled wages in the formal sector and per capita income in the low-productivity sectors.
• The description of the informal (low-productivity) sector in less-industrialized countries is based on Lewis (1954). The low-productivity sector is a traditional subsistence sector with a marginal productivity of workers of (close to) zero lacking access to capital and modern technologies. The high-productivity sectors grow through the accumulation of capital and technical progress; as regions develop, labour moves from the low- to the high-productivity sectors.
• Investments by capital owners in the various regions are allocated on the basis of the regional returns on investments and the preferences for investment in certain regions. In each region the supply of capital matches the demand and is based on interest rates. Equilibrium between global investments and global savings implies global outlays to equal global income. The relative output prices ensure equilibrium of every single product market.