Modelling & training > Our suite of economic models > MDM-E3: UK Multisectoral Dynamic Model - E3 > MDM-E3: Overview
MDM-E3: UK Multisectoral Dynamic Model - E3
MDM-E3, the Multisectoral Dynamic Model of the UK economy, is maintained and developed by CE as a framework for generating forecasts and alternative scenarios, analysing changes in economic structure and assessing energy-environment-economy (E3) issues and other policies. MDM-E3 provides a one-model approach in which the detailed industry and regional analysis is consistent with the macroeconomic analysis: in MDM-E3, the key indicators are modelled separately for each industry sector, and for each region, yielding the results for the UK as a whole. MDM-E3 is one of a family of models which share the same framework, general design, methodology and supporting software; the scope of the E3ME model is European; that of E3MG is global.
To analyse structure, the E3 models disaggregate industries, commodities, and household and government expenditures, as well as foreign trade and investment, and the models incorporate an input-output framework to identify the inter-relationships between industry sectors. The E3 models combine the features of an annual short- and medium-term sectoral model estimated by formal econometric methods with the detail and structure of input-output models, providing analysis of the movement of the long-term outcomes for key E3 indicators in response to economic developments and policy changes. The models are essentially dynamic simulation models estimated by econometric methods.
In summary MDM-E3 provides:
- annual comprehensive forecasts to the year 2020:
- for industry output, prices, exports, imports and employment at a 41-industry level; for household expenditure by 51 categories; for investment by 27 investing sectors
- for the nine Government Office Regions, Wales, Scotland and Northern Ireland
- full macro top-down and industrial bottom-up simulation analysis of the economy, allowing industrial factors to influence the macro picture
- an in-depth treatment of changes in the input-output structure of the economy over the forecast period to incorporate the effects of technological change, relative price movements and changes in the composition of each industry's output
- scenario analysis, to inform the investigation of alternative economic futures and the analysis of policy
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Examples of our work
Modelling Scenarios of Green Fiscal Reform for the UK
Esmée Fairbairn Foundation
This project investigated the major research issues related to the introduction of green tax reform in the UK. It was carried out on behalf of the UK Green Fiscal Commission (GFC) established to guide the work, by a consortium led by the Policy Studies Institute and including CE and the Cambridge Centre for Climate Change Mitigation Research (4CMR), University of Cambridge. The over-arching objective of the study was to establish an evidence base to support the large-scale introduction of green taxes so as to respond effectively to global environmental challenges (especially climate change) and bring about cost-effective environmental improvements that promote innovation in business and assist the creation of new industries. Green taxes are defined broadly as any revenue-raising market-based environmental economic instrument , including for example, auctioned emissions allowances.
The subsidiary objectives of the GFC were threefold: first to generate in an accessible from a definitive body of knowledge about every aspect of revenue-raising green taxes of practical use to policymakers; secondly to increase the understanding of the impacts and net potential benefits of green taxes among policy makers, businesses, NGOs and other stakeholders; and, lastly, to raise the profile of green taxes in the political and economic debate expected to occur in the run-up to the next General Election.
CE's role within the project was to model illustrative scenarios to 2020 for green fiscal reform for the UK that give results for environmental impacts (particularly CO2 emissions), energy demand, fuel prices, GDP and employment within different economic sectors and for key variables from household and transport energy consumption. The modelling is based on CE's energy-environment-economy model of the UK (MDM-E3). A major and innovative aspect of the modelling work in the study involved the development, in collaboration with 4CMR, of the Transport Sub-model in MDM-E3.
Evaluating the Impact of the Economic Recession on UK Carbon Budgets
Committee on Climate Change
In December 2008, the Committee on Climate Change (CCC) made its first recommendations on carbon emissions targets and budgets. In the light of the recession that was already taking hold by the time the CCC reported, the CCC required updated energy use and emissions projections in the short term and in the period to 2020 that reflected the impact of the reduction in economic activity and estimates of the sustained loss of output during the recession. In this project we used MDM-E3 to model the impact of the downturn, assessing the trade-off between falls in economic activity (which typically reduce greenhouse gas emissions), falls in energy prices (which often lead to increased emissions) and the fall in investment which can lead to both an increase or a reduction in carbon emissions depending on the investing sector and the type of investment.
Projecting UK CO2 Emissions and Assessing the Economic Impacts of Carbon Budgets
Committee on Climate Change
The Committee on Climate Change (CCC) is an independent statutory body to provide independent, expert advice on how the UK can best achieve its climate change goals. It was set up under the Climate Change Bill, which became law in 2008. This study provided a set of projections to assess the impact on CO2 emissions, energy use, and competitiveness and the macroeconomy of the three five-year carbon budgets, which will cover UK CO2 emissions up to 2022. The project had three objectives: (1) to provide a set of reference scenario projections of UK energy demand and CO2 emissions to 2030, under a range of assumptions on future fossil fuel prices, growth and demographic change and the effectiveness of policies; (2) to provide projections for energy demand and CO2 emissions for a range of abatement scenarios, and; (3) to provide an assessment of the economic impacts of the abatement scenarios defined as take up of measures identified in marginal abatement cost curves (MACCs) developed by the CCC. The work was carried out using CE's integrated Energy - Environment - Economy model of the UK economy, MDM-E3. The results were reported by the Committee in its inaugural report, 'Building a low-carbon economy - the UK's contribution to tackling climate change', which was published in December 2008. The CCC commented that 'CE have a recognised and credible energy projections model, which provides a good benchmark to other models, notably DECC’s. We were pleased to receive full detailed results, and a well presented final report.'
Evaluations of UK energy and emission targets for 2020
Friends of the Earth
In this project, CE used the MDM-E3 model of the UK to represent a set of policies designed to meet the energy and emissions target set for by 2020 (20% renewables target, minimum reduction of 26% in CO2 emission and improvement of energy efficiency by 20%). The study considered the potential and impact of policies encouraging greater energy efficiency in all sectors of the economy including the residential sector, as well as policies promoting greater use of renewable fuels to generate heat and power. It also examined the impact of potential reductions in the costs of renewable power generation technologies to reflect induced technology changes that the EU-wide target could stimulate and impact of non-renewable power on installation of additional renewable capacity. The study assessed the impacts on the macroeconomy, energy demand, prices, fuel mix of energy supply and CO2 emissions.
Macroeconomic Rebound Effect of Energy Efficiency Policies in the UK Economy
UK Department for Environment, Food and Rural Affairs
This project was led by 4CMR (Cambridge Centre for Climate Change Mitigation Research) in the University of Cambridge, with CE responsible for the modelling and scenario analysis. Other collaborators were Policy Studies Institute and Dr Horace Herring,an independent energy consultant. The main objective of the work was to examine the macroeconomic 'rebound effect' on the UK economy from energy efficiency policies and programmes. The rebound hypothesis suggests that, at the macroeconomic level, all energy efficiency measures might be offset in their effects on aggregate energy savings by associated increases in energy demand.
The study explored the relationships between energy efficiency, energy consumption, economic growth and policy interventions. CE's Energy-Environment-Economy model of the UK economy (MDM-E3) was used to model the policy impact , building on work undertaken previously to analyse the economic and environmental implications to 2020 of introducing renewable energy, combined heat and power (CHP) and domestic energy efficiency measures. CE provided a base case to 2010 and then developed and analysed a set of scenarios to allow the estimation of the rebound effects for final energy demand disaggregated by six MDM fuel-using sectors: energy-intensive industries, other industry, road transport, air transport, other final uses (commerce etc) and households (dwellings).
Analysis to Support a Review of the Likely Effectiveness of the UK Climate Change Programme
The Carbon Trust
This study provided analysis to support the Carbon Trust's investigation into the measures currently included in the UK Climate Change Programme. Various policy scenarios were constructed to understand the impact and effectiveness of different economic policy instruments for limiting CO2 emissions in the industrial and public sectors. These included the Climate Change Levy, the Climate Change Agreements negotiated with several energy-intensive industrial sectors, and the EU Emissions Trading Scheme. The scenarios were implemented in CE's integrated energy-economy-environment model of the British economy, MDM-E3, and the results showed the expected behavioural responses to the policies so as to inform an assessment of the feasibility and cost-effectiveness of the various policy measures. The results were then compared with findings from alternative modelling approaches based on bottom-up, technologically-based industrial end-use simulation and macroeconomic general equilibrium-type models, to strengthen confidence in the findings (in the cases where the models agreed) and to identify which findings depend critically on the kind of modelling approach adopted.
Modelling the Initial Effects of the Climate Change Levy
HM Revenue & Customs
This study examined the environmental effectiveness of the Climate Change Levy (CCL), focussing specifically upon the identification of any 'announcement' effects and the effects of induced price changes on energy markets and greenhouse gas emissions (GHGs). The findings were used to support the British government's analysis of the CCL in delivering carbon dioxide savings by 2010, published in Section 7.19 and Box 7.2 of the UK Budget 2005 report 'Investing for our future'. The study was led by CE in collaboration with the Policy Studies Institute, Westminster University and the Department of Applied Economics, University of Cambridge. The overall objective of this study was to investigate the effectiveness of the CCL in reducing energy use/carbon emissions, which was its principal purpose, and, where possible, its other (eg economic) effects. It was essential to consider the effects of the Climate Change Agreements (CCAs) in the modelling work, since the overall impact of the price signal provided by the CCL was necessarily influenced by the presence of the CCAs. This innovative study used the Cambridge Econometrics MDM-E3 (energy-environment-economy) model of the UK to construct alternative scenarios, combined with off-model analysis and other research methods where necessary. The project contained the following three elements, which were addressed in turn: first, the investigation of the CCL’s announcement effect (if any) on business energy use, supported by a comprehensive technical paper proposing a ‘best practice’ method or economic evaluation following a literature review of the announcement effects of carbon/energy taxes and related ex-post evaluation studies; second, the investigation of the CCL’s effects since its introduction on business energy use so far; and finally, the likely energy and carbon savings from the CCL by 2010 that were informed by the findings from the ex-post analysis.
Economic Impact of the UK Screen Industries
UK Film Council
This innovative and comprehensive study of the economic impact of the UK screen industries was led by CE in collaboration with Optima, specialists in in-depth strategic studies of media markets. The study undertook an extensive survey of the screen industries and the resulting data was combined with information from CE's Multisectoral Dynamic Model (MDM) of the UK and its regions to develop a model to show how activity in the screen industries affects the economies of the regions of the UK. The model was used to provide a common analytical framework for comparing the screen industries with other UK industries, and to provide estimates of regional and national economic multipliers for the screen industries. The study delivered a basis for improved understanding of the inter-regional dynamics of the screen industries to assist the UK Film Council in its strategic development. On completion, the client commented: 'I appreciated the way Cambridge Econometrics was able to combine high level technical work with an astute assessment of the political context in which their work would be read. I’m sure the findings of the study they did for us will prove influential for a number of years into the future.'