Jorge A. Garcia, Roy Brouwer (2022). Development of a Computable General Equilibrium Model for Hydro-Economic Analyses of the Canadian Economy. Proceedings of the GWF Annual Open Science Meeting, May 16-18, 2022.

Current macro-economic modeling in GWF of water resources management rely primarily on input-output approaches which have a number of limitations for economic analyses. Among these are the exclusion of prices for commodities and input factors, the lack of primary input substitution and technological innovation, their short-term validity, and their partial description of the economy, namely the industry production side.

A Computable General Equilibrium (CGE) model is a more comprehensive modeling tool that describes the economy using a systems approach where all elements of the economy are interrelated with each other, either directly or indirectly. These models allow for price changes in commodities and factors, primary input shocks, technological change, and commodity substitution. Therefore, CGE models produce a more accurate response of the economy to water quantity or quality changes.

A novel water CGE model is therefore developed for the Canadian economy. Water is introduced as a primary input for production in the industries that extract water directly from different water sources. Other primary inputs are land, other natural resources, labor, and capital. The water supply sector and water delivery and irrigation commodities are explicitly singled-out. Water flows and costs are taken from the values reported by Statistics Canada.

The development of the CGE model entailed the construction of social accounting matrices where economic data on supply and use tables, current and capital flows of economic agents, and financial flows are collected and balanced to produce a consistent picture of the economy.

Scenarios are developed to reflect expected future water supply shocks to the Canadian economy as a result of climate and land use changes (e.g., increase in irrigated agriculture) and are tested for their direct and indirect economic impacts. In these scenario’s, water supply is increased or decreased up to 50% with respect to current baseline water intake values. It’s been found that the economy produces a non-linear response with respect to water changes. The contraction of GDP produced by decreasing available water is higher than the expansion of GDP due to increasing water availability. For example, a 50% reduction in water supply produces a 0.08% GDP contraction, whereas a 50% water increase yields only a 0.04% GDP expansion. The economy hence seems more sensible to water shortages than water expansion. Among the various industries using water, the mining sector is most sensitive to water supply changes, followed by utilities, manufacturing and agriculture.

This newly developed CGE model holds promise to produce more comprehensive hydro-economic analyses, and better valuate the role of water in the Canadian economy for present and future generations.

AOSM2022 Integrated Modelling Program for Canada First Author: Jorge A. Garcia Additional Authors: Roy Brouwer