CONTO
Overview
CONTO is a system of interconnected macro-structural calculations at the national level, which allows it to describe the synchronised development of economy and the energy sector of the Russian Federation, as well as the level of associated CO2 emissions. The economic unit is represented by input-output tables, which describe the inter-industry goods flows during production and consumption processes. The energy sector is described in detail in the form of energy balances corresponding to the methodology of the International Energy Agency (IEA). The modelling approach is elaborated in such a way that indicators of socioeconomic development affect the volume and efficiency of energy consumption in the country, which, in turn, determine the economic dynamics of industries involved in the technological chain of energy supply. CONTO also includes the optimisation unit for evaluating the effective fuel structure in the transportation and power sectors based on the cost characteristics of competing technologies. CO2 emissions are calculated in connection with economic input-output tables. This logical framework is well suited to simulating emissions mitigation by both economically and through regulations stimulating energy efficiency and structural change in the fuel mix. Estimation of the macroeconomic impacts of the application of climate-related measures is a substantial component of the modelling process. CONTO is designed specifically for this task formulation, although it is rather flexible for a wide range of research issues for the economy-energy-emissions triangle and can be expanded during the implementation of the PARIS REINFORCE project to take into account potentially appropriate emission mitigation practices.
Key features of the CONTO model
Economic activities coverage
The statistical base of the CONTO model is a series of input-output (I/O) tables for Russia at current and constant prices for 1980–2015, which are consistent with the official data of the Russian Federal State Statistics Service (Rosstat), including the System of National Accounts (SNA). There are 44 economic activities in the I/O tables of CONTO shown in the following table.
| Sector detailed in CONTO model | |
|---|---|
| Agriculture | Medical, optical, and precision instruments |
| Petroleum extraction | Automobiles, highway transport equipment |
| Natural gas extraction | Sea transport equipment and its repair |
| Coal mining | Airplanes, rockets, and repair |
| Other Fuels, incl. Nuclear | Railroad equipment and its repair |
| Ores and other mining | Recycling |
| Food, beverages, tobacco | Electric, gas, and water utilities |
| Textiles, apparel, leather | Construction |
| Wood and wood products | Wholesale and retail trade |
| Paper and printing | Hotels and restaurants |
| Petroleum refining | Transport and storage |
| Chemicals | Communication |
| Pharmaceuticals | Finance and insurance |
| Plastic products | Real estate |
| Stone, Clay, and Glass products | Equipment rental |
| Ferrous metals | Computing service |
| Non-ferrous metals | Research and development |
| Fabricated metal products | Other business services |
| Machinery | Government, defense, social insurance |
| Computers, office machinery | Education |
| Electical apparatus | Health services |
| Radio, television, communication equipment | Other social and personal services |
Energy sectoral detail
The Russian energy sector is described in the form of energy balances corresponding to the methodology of IEA. The energy balance primary includes coal, natural gas, oil, nuclear, hydro, solar, wind, biofuels, and other renewables; and secondary energy resources.
The list of supply and demand categories within energy balance is similar to IEA’s methodology with slight simplifications, which are performed in order to synchronise the nomenclature of energy and economy units of CONTO.
Total primary energy supply (TPES) includes production, net exports, bunkers and stock changes.
The final energy consumption unit is very detailed in order to guarantee the maximum coordination with the economic I/O tables. It includes:
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The final energy consumption indicators of production sectors are directly dependent on their macroeconomic characteristics, which are described in the I/O tables. For instance, natural gas consumption in manufacture of chemicals has the linkage with economic output in this industry, etc. Residential consumption, as with personal transportation, depends on population and incomes.
Secondary consumption includes electricity plants, CHP plants, heat plants, oil refineries, coal transformation, other transformation, energy industry own use and losses.
CONTO provides an optimisation unit that allows to calculate the most cost-effective structure for satisfying the final demand on electricity/heat and transportation. This unit is filled with the technologies for the production of primary and secondary commodities (mining & extractions processes, power plants, etc.) with cost characteristics. Technologies for the production of hydrogen and its use in transport are also put into the optimisation block, although they are not currently used in Russia.
Representation of the CONTO energy system
Time periods
Currently, the forecast period for the I/O tables, energy balance, and the energy optimisation unit in the CONTO model is 2040. The potential duration of the forecast period is limited only by the quality of scenario indicators. The energy optimisation unit works through ten-year periods (2010, 2020, 2030 and 2040). The I/O tables and the total energy balance are formed for each year.
Climate module & emissions granularity
CONTO is a national-level model that does not have a climate module and that does not calculate the impact of anthropogenic emissions on climate change. The current version of the model tracks only carbon dioxide (CO2) emissions. It may be expanded during the implementation of the PARIS REINFORCE project in order to provide a more complete description of anthropogenic emissions.
Drivers of energy and other GHG-emitting service demands
In CONTO, all socioeconomic parameters are endogenous, other than demographic parameters (e.g. population) which are specified exogenously. The model contains a time series of GDP and output for 44 industries, national accounts tables, the balance of income and expenses of the population, indicators of the state budget, balance of payments, balances of the Central Bank and credit organisations, data on sectoral employment, and stocks of fixed capital, etc. All of the above parameters describe the socioeconomic development of the country and affect the processes of energy consumption.
Calibration of the model
Within CONTO, calibration is performed only for the energy optimisation unit, which estimates the cost-effective fuel mix in the power sector and road transportation sector. The base year is 2010. The main variables to be calibrated include the costs for different technologies; the capacities and utilisation rates; and particular Russian electricity market rules (regarding the supply curve formation). The source of statistical data is IEA’s energy balances.
Mitigation/adaptation measures and technologies
CONTO is focused on the implementation of low-carbon solutions in the field of electricity and heat production, and automobile transport. Considerable attention is paid to improving the efficiency of energy consumption through the modernisation of production capacities. By simulating the substitution of low-carbon for high-carbon technologies in response to their relative costs, as well as emissions constraints and/or carbon prices, the CONTO model simulates mitigation. The principal energy sector CO2 mitigation technology options are as shown in the following table.
Economic rationale and model solution
Input-output unit
In the economic unit, forecast calculations are carried out in accordance with the input-output methodology. In fact, it is an iterative econometric inter-sectoral model. The concept of the model reflects the logic of a real business cycle.
The iterative calculation procedure begins with an econometric calculation of the dynamics of the elements of final consumption (Y), including household consumption, government consumption, investments, changes in inventories, and net exports. Next, output (X) is calculated as function of final consumption (Y) by solving the basic I/O equation, which also uses a direct cost matrix (A) and a diagonal identity matrix (I):
Based on the output and investments, the number of employees and the fixed assets by sectors are calculated. Then, the model calculates the value added (VA) as a function of output (X), which consists of wages, profit, depreciation and taxes:
At the next step, in accordance with the Leontief price model and based on the elements of value added (VA) and output (X), the current prices (P) are calculated:
The elements of value added serve as the indicators of incomes of population (wages), business (profit) and government (taxes). These incomes are redistributed into the household consumption, investments and government consumption. Import is a closing element in meeting demand in case of insufficient own capacities (insufficient investment).
This closes the settlement procedure. The process of calculations is repeated until the convergence conditions are met. Once convergence is achieved, the model moves to the next year.
The solution algorithm in the economic unit of CONTO
Interaction of input-output and energy units
This section describes the energy calculation algorithm in the CONTO model. It notes the interaction of input-output tables and final energy consumption. It is implemented as follows.
Energy consumption in an industry should simultaneously reflect two factors: the gross indicator of the industry and energy efficiency. An industry output can be used as a gross indicator, and energy efficiency is primarily improved through the modernisation of production facilities—that is, through the investment process. In addition, capacity utilisation has an impact. This is important because, firstly, there are economies of scale, and secondly, companies incur conditionally fixed costs.
Thus, final energy consumption (FC) is calculated as multiplication of output (X) by specific energy consumption per output unit (EFF), and the latter is the regression function of investment (INV) and capacity utilisation (UTILISATION) in each industry:
The direct costs matrix (A) is in fact a description of the technological structure of the economy. Therefore, its components’ (I/O coefficients) dynamics should reflect energy efficiency processes. The CONTO model implements an inverse relationship between energy balance and I/O tables, within which particular I/O coefficients (a) regressively depend on EFF:
For example, as a result of investments, production capacities of the ferrous metal industry in Russia are being updated, leading to an increase in the efficiency of natural gas use, which is equivalent to a decrease in the specific consumption of natural gas per unit of output of ferrous metals. This means that the I/O coefficient describing the flow from the natural gas production sector to the ferrous metal production sector should be reduced proportionally.
Exogenous parameters of energy efficiency
In the CONTO model, the parameters of fuel consumption on different types of vehicles, fuel consumption in power and heating sectors, and energy efficiency in the residential sector are exogenous.
New technologies unit
Currently, a unit of new technologies is being developed. It includes the estimates of the resources and materials use by new and traditional technologies for the production of electricity and road transport. The production of electric vehicles requires less ferrous metals, more non-ferrous metals and electrical equipment (batteries methodologically belong to this category) compared to traditional internal combustion engine (ICE) cars. Solar generation requires significant volumes of metals, concrete and silicon at the investment stage. Wind generation requires significant volumes of concrete, metals, composites and polymers at the investment stage. Therefore, the spread of low-carbon technologies will cause structural transformations in the economy. In the CONTO model, such processes are described through the redistribution of I/O coefficients (a).
CO2 emissions unit
CO2 emissions are calculated based on the output of industries in the I/O tables (X) and their specific carbon intensity (carbon):
CONTO solution algorithm
Key parameters
CONTO pays special attention to the socioeconomic development of Russia. Therefore, in addition to the parameters related to the energy sector, there are indicators which significantly determine the economic dynamics in the country. These arise from the fact that Russia is a key supplier of hydrocarbon fuels to the world market. This leads to high dependence of macroeconomic indicators on the situation in foreign markets, and also increases the role of fiscal policy.
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Key economic parameters are:
- demographic data (stabilisation and gradual aging of population);
- oil price (USD) rate (affects income of commodity sectors and dynamics of prices in the economy);
- tax rates (affect business profits and state budget revenues);
- budget expenditures;
- exports of the main products (oil, natural gas and coal); and
- growth rates of the world and the EU economy (affect the exports of Russian products).
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Key energy parameters are:
- fuel/energy efficiency;
- energy technology costs; and
- resources of different types of energy.
Policy questions and SDGs
Key policies that can be addressed
In Russia, crucial attention is paid to the issue of sparking economic growth after a long recession. That is why the fundamental step in developing national climate policy is to provide the comprehensive scientific knowledge of potential climate-oriented ways to positively affect the economy growth and quality of people’s lives.
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In the Russian case study, the key policy-relevant
investigations may be focused on searching the trajectories of effective decarbonisation
of the country that is both in line with its national socioeconomic targets and aligned
with a low-carbon world:
- What is the structure of the Russian energy balance, consistent with the Paris Agreement implementation?
- Is there a mix of decarbonisation technologies in the Russian economy that have a neutral/positive effect on socioeconomic development?
- What solutions can have export potential in the low-carbon world?
- What decarbonisation measures can rely heavily on their own production potential?
- What is the impact of emissions mitigation on the price dynamics in Russia?
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Key policy measures that can be implemented in CONTO:
- Stimulating the modernisation of production capacities and, consequently, their fuel efficiency (accelerated investments through adjusting business income);
- Subsidies on particular technologies (through adjusting their costs);
- State investment programs in the field of renewable energy, including related production industries;
- CO2 emissions constraint, carbon tax implementation.
Implications for other SDGs
As a national-level model, CONTO is able to assess the qualitative direction of Russia's movement in the field of the sustainable development goals, as detailed in the following table.
| SDGs | Details |
|---|---|
| §1. No Poverty | Level of average income, employment rate |
| §3. Health | Sufficiency of government financing for health care |
| §4. Quality education | Sufficiency of government financing for education |
| §7. Affordable and clean energy | Share of low-carbon energy, affordability in terms of price/income ratio |
In the case of Russia, these goals may contradict each other, since they will compete for limited financial resources. Therefore, it is possible to evaluate elasticities with which the achievement of one goal can affect the performance of others.
Recent publications using the CONTO model
| Paper | Topic | Key findings |
|---|---|---|
| Shirov and Kolpakov (2019) | Macroeconomic impact of the energy technologies changes in Russia: Input-Output approach | Under IPCC’s global warming of 1.5 ºC scenario, the Russian economy may lose 0.5 percent points of annual growth. The spread of low-carbon technologies is not economically effective yet. Dependence on imports is a crucial constraint. |
| Shirov et al. (2018) | Macroeconomic impacts of the nuclear energy development (methodology and practical assessment) | Nuclear energy is one of the possible low-carbon solutions. It is rather competitive in Russia. It creates significant inter-industry interactions including at the inter-country level. |
| Shirov and Kolpakov (2017) | Input-Output approach as an instrument for estimating potential national ecological targets | Having implemented the Paris goals, the Russian economy is able to grow by only 2% which is not enough for solving accumulated structural problems. Initial steps aiming for the modernisation of the Russian economy are needed. |
| Kolpakov et al. (2017) | Modernisation of industry and high-tech development in the context of “green” growth | The international experience in the development of the green economy is analysed. Common practice shows that green growth is associated with rising prices, accelerating GDP and higher employment. The forced creation of new high-tech industries contributes to economic diversification. |
| Shirov et al. (2014) | Input-output macroeconomic model as the core of complex forecasting calculations | This paper considers the basic approaches to formation of the up-to-date I/O forecast-analytical tools. It provides a description of key functional relationships in the I/O macroeconomic CONTO model. The paper defines the role of the I/O model in the system of forecasting calculations used at the Institute of Economic Forecasting Russian Academy of Sciences. |
References
Shirov, A., & Kolpakov, A. (2019). Macroeconomic impact of the energy technologies changes in Russia: Input-Output approach. Paper for 27th IIOA Conference, 2019.
Chernyakhovskaya Yu.V., Shirov A.A., Kolpakov A.Yu., Polzikov D.A., Frolov I.E., Yantovsky A.A., Sidorenko V.N., Tishchenko E.B., Tishchenko S.A., & Morozova I.M. (2018). Macroeconomic impacts of the nuclear energy development (methodology and practical assessment). Scientific report. Moscow, International Relations Publ. 70 p. (In Russian).
Shirov, A., & Kolpakov, A. (2017). Input-Output approach as an instrument for estimation of potential national ecological targets. Paper for 25th IIOA Conference, 2017.
Porfiryev, B.N., Borisov, V.N., Budanov, I.A., Vladimirova, I.L., Dmitriev, A.N., Eliseev, D.O., Kolpakov, A.Yu., Kopylov, A.E., Kuvalin, D.B., Lavrinenko, P.A., Naumova, Yu.V., Semikashev, V.V., Sinyak, Yu.V., Suvorov, N.V., Terentyev, N.E. & Yankov. K.V. (2017). Modernization of industry and high-tech development in the context of “green” growth. Monograph / Ed. by Acad. RAS B.N. Porfiryev. Moscow. Scientific Consultant Publ. 2017. 434 p. (In Russian).
Shirov A.A., & Yantovsky A.A. (2014). Input-output macroeconomic model as the core of complex forecasting calculations. Studies on Russian Economic Development. 25(3). 225-234.
