Turkey Green Growth Policy Paper: Towards a Greener Economy

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6. Economy-wide Impacts of Greening Scenarios: A Pilot General Equilibrium Analysis

This Chapter presents the results of a pilot economic analysis focusing on the impacts of measures to further green the Turkish economy, with a particular focus on the seven strategic sectors (automotive, construction, electronics, iron and steel, machine industry, and white goods, as well as agriculture), and consistent with the definition of “green growth” in Turkey in Chapter 3 above. The results are based on a Computable General Equilibrium (CGE) model which simulates the basic structure of the Turkish economy, with a particular focus on the six strategic industrial sectors and agriculture, but without a detailed technology options specification and marginal abatement cost curves (MACs) for pollution mitigation. Future follow- up work could expand, enrich, and customize the approach used in this pilot study by building and linking MACCs for each of the strategic sectors (also including energy, water, and land) to the CGE model. Therefore, the results presented here should be regarded as stylized and suggestive only.

6.1 Introduction

Greening policies in Turkey are very much linked to the country’s aspirations in terms of sustainable development and poverty reduction, and its commitments in terms of achieving international environmental standards and contributing to the global effort on mitigating the impact of climate change. This is a very broad agenda, and the aim of the present report—and the analysis below--is to contribute to understanding some of the key trade-offs involved in greening the Turkish economy, and in particular the impact on economic growth and employment. Moreover, it is important to note that while –as discussed in Chapter V—the range of green policy measures is quite broad, the present analysis focuses mainly on taxes and investments as the main instruments for green growth in Turkey, and does not deal with institutional and implementation issues related to these policies, an area that will need to be investigated separately. Moreover, the structure of the modeling analysis in this Chapter puts much of the burden of pollution cost abatement on the public sector, through ear-making pollution tax revenues for green jobs, and innovation. In reality, much of the abatement is likely to happen endogenously by the private sector, thus reducing both pollution tax revenues and the need for public investment in abatement activities.

In its quest to pursue green growth policies, the Turkish Government (through MoD) had three main questions: (i) How will compliance with key environmental regulations to meet EU Directives--which is one important part of greening the Turkish economy-- impact economic growth and employment (both in the aggregate and for key sectors; (ii) Can Turkey sustain the current high growth path by greening its production in key sectors; and (iii) What policy instruments can be used to maximize greening at the least cost (or maximum benefit) to the Turkish economy.
To begin to respond to the these questions, an applied dynamic general equilibrium model (computable general equilibrium (CGE) type^⁴⁰) of the Turkish economy was constructed to assess the impact of a selected number of policy instruments and public policy intervention mechanisms aimed at greening growth and adding green jobs to the economy.
For example, policy makers could respond with additional measures that may include a set of broad, market-based incentives designed to accelerate technology development and deployment in Turkey as part of its possible national objective towards greening its economy, together with ensuring high employment and sustainable growth patterns. The main objective of this analysis is to demonstrate the means to obtain a coherent attempt at integration of sustainable development priorities into national development planning and implementation of environmental policy objectives both at the macro economic and sectoral levels. To this end, a dynamic, multi-sectoral macroeconomic model has been devised for Turkey to study issues of environmental and macroeconomic policy interactions over both the commodity and the factor markets; the impact of various policies on the environment and on abatement; and to investigate various alternatives on environmental policy design along with their likely consequences from the points of view of growth, fiscal and foreign trade balances, employment, and economic efficiency.
The model is in the tradition of an applied general equilibrium paradigm where the production - income generation – consumption – saving – and investment decisions of the economy are depicted within a market equilibrium setting. Optimizing economic agents are modeled as responding to various price signals as affected by the government’s various tax/subsidy policies. The economy operates in an internationally open environment where the exchange rate and the foreign capital inflows interact with the exports and imports of the domestic sectors.
While Annex 1 presents the detailed model specification and algebraic structure, and Annex 2 the data model calibration and base path, after a brief description of the model, the main focus of the remainder of this Chapter documents findings from the analytical investigation of alternative green policies for Turkey. The study spans the 2010-2030 growth trajectory of the Turkish economy with a detailed emphasis on: (i) GHG emissions (CO2 equivalent^⁴¹) and particulate matter (PM10); (ii) water pollution from household and industrial effluent; (iii) solid waste pollution from household and industrial activity; (iv) water and fertilizer use and soil degradation in agricultural activities; and (v) the relevant market instruments of abatement. It is important to note that the choices of these areas of greening are directly related to the key EU Environmental Directives (discussed below).

6.2 Model structure and basic features

The CGE approach, compared with other modeling techniques (such as linear programming or input-output analysis) for environmental policy evaluation proves more attractive with its ability to trace the relationship between production costs, their relevant technologies, consumer choices, and interaction of the green policy instruments with the fiscal and foreign trade policies throughout the economy in an internally consistent way.

The model is in the Walrasian tradition with optimizing agents against market signals and a simultaneous resolution of market equilibrium of commodity prices, the wage rates and the real rate of foreign exchange. “Dynamics” are integrated into the model via “sequentially” updating the static model into a medium-run of twenty years over 2010 through 2030. Economic growth is the end result of (i) rural and urban labor population growth; (ii) investment behavior on the part of both private and public sectors; and (iii) the total factor productivity (TFP) growth performance of the Turkish economy.
The supply-side of the economy is modeled as twelve aggregated sectors. In line with our focus on strategic industrial sectors and environmental policy evaluation, the disaggregation scheme develops into the energy sectors and critical sectors of GHG and Particular Matter (PM10) pollutions in detail. It thus aggregates a large number of other activities that, although being far more important contributors to total gross output, are not germane to the strategic growth and greening problem. The 12 sectors specified are: Agricultural production, Coal Mining; Petroleum and Gas; Refined Petroleum and chemicals;
Figure 6.1 Flows of commodities, factors and emissions in the model

Electricity Production; Cement Production; Iron and Steel Production; Machinery and white goods; Electronics; Automotive; Construction; and Other economy.
While labor, capital and a composite of primary energy inputs, electricity, petroleum and gas and coal, together with other intermediate inputs, are the factors of production, for modeling agricultural production activities the model further delineates between rainfed and irrigated land. Water and fertilizer use (nitrate and phosphorus) are explicitly recognized as part of land use in agriculture production. Emissions arising both from production activities and from consumption activities are modeled within the specification of the economy. Figure 6.1 shows the new environmental components within the structure of the model. An extremely important characteristic of the application of the model is that most runs assume Labor market rigidity, consistent with broad stylized facts of today’s Turkish labor market. This adds to the cost of adjustment to environmental tax measures and strengthens the case for following a coordinated portfolio of environment and growth measures for green growth, as discussed below.
Sectoral production is modeled via a multiple-stage production technology where at the top stage, gross output is produced through a Cobb-Douglas technology defining capital (K), labor (L), and intermediate inputs and primary energy composite (ENG) as factors of production. At a lower stage, the primary energy composite is a CES aggregate of three major sources of energy supply: coal, electricity and petroleum and gas. The CES and Cobb-Douglas specifications incorporate the potential for technological substitution of inputs by the producer in response to relative factor prices, including impacts of tax/subsidy instruments. The CES allows for more substitution responses above and beyond the standard Cobb-Douglas specification where unit elasticity is implicitly assumed. In addition to these, in agriculture the model accommodates land aggregate as an additional composite factor of production. Agricultural land aggregate is further decomposed as a constant elasticity of substitution (CES) function of irrigated and rain-fed land. This decomposition is responsive to rental rates of the type of land respectively, solved endogenously by the model. Water used in irrigated land is set as a Leontief coefficient. Fertilizer use is similarly modeled as a Leontief technology as a ratio of aggregate and used. This means that fertilizer and irrigation water are used in fixed proportions with agricultural output, so reductions in either input as a consequence of environmental policy would lead to a proportionate reduction in output.

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