WARM: a European model for energy and environmental analysis

This paper describes the structure of a newly developed econometric, imperfectly competitive, general equilibrium model for the medium term study of energy and environmental problems. The geographical coverage of the model regards twelve European countries as well as the European Union as a whole. Compared to existing quantitative E3 (economy-energy-environment) models, the WARM model is characterized by a few novel and relevant features Firstly, in contrast to multicountry interlinked models, it copes with the international dimension by integrating differences from a common European denominator within a unified and homogeneously designed framework. A panel data estimation approach is used to achieve this objective. Secondly, in contrast to the traditional market-based philosophy of many econometric models, it adopts a perspective focused upon economic agents' decisions. Thirdly, in contrast with the practice of modelling technical progress as an exogenous and deterministic phenomenon, it incorporates an explicit attempt of modelling the sources and effects of endogenous technical change. A Kalman filter latent variable approach is the methodology from which statistical information on the dynamics of technical progress can be obtained. Finally, all markets in the model are imperfectly competitive, including the labour market where the wage bargaining process is explicitly modelled and estimated. This last feature is especially important in view of the European unemployment problem.