Where are the industrial technologies in energy-economy models? An innovative CGE approach for steel production in Germany

Top-down computable general equilibrium (CGE) models are used extensively for analysis of energy and climate policies. Energy-intensive industries are usually represented in top-down economic models as abstract economic production functions, commonly of the constant-elasticity-of-substitution (CES) or translog functional form. This study explores methods for improving the realism of energy-intensive industries in top-down economic models. We replace a CES production function with a set of specific technologies and provide a comparison between the traditional production function approach in CGE models and an approach with separate technologies for making iron and steel. In particular, we investigate the response of the iron and steel sector to a set of CO2 price scenarios. Our technology-based, integrated approach permits a choice between several technologies for producing iron and steel and allows for shifts in technology characteristics over time towards best practice, innovative technologies. In addition, the general equilibrium framework allows us to analyze interactions between production sectors, for example between electricity generation and iron and steel production, investigate simultaneous economy-wide reactions and capture the main driving forces of greenhouse gas emissions reductions under a climate policy. We conclude that technology-specific effects are crucial for the economic assessment of climate policies, in particular the effects relating to process shifts and fuel input structure.