96
M. P. Ramos and O. O. Chisari
given the sectoral aggregation of this multi-sector economy in 6 sectors, such as Agriculture and Fishing as an aggregate, the small open economy assumption remains
realistic, since Argentina could not influence prices at that level of sector aggregation.
Based on these six sectors, we identify Argentina’s production/consumption patterns
and the sectors’ carbon intensity. The agents that interact in the model are these singlecommodity firms, two types of households—rich and poor—, the government and
the rest of the world. Below we describe the main assumption of agents’ behaviour
and closure of the model.
Firms. A representative firm of each sector maximizes its profits subject to the
production function of a single commodity. The production function nests inputs and
value added in the first level in a fixed proportion (Leontief’s assumption). Then, two
mechanisms that could reduce carbon emissions are modelled in the further nests
of the production function. First, for inputs, we assume a two-level nest, where,
in the first level, EGS and non-EGS inputs are combined according to a Cobb–
Douglas assumption and then, only the EGS products show, in the second nest, a
greater substitution between domestic and imported—assumed relatively cleaner—
EGS products (Constant Elasticity of Substitution—CES—assumption). The second
mechanism consists of reducing the carbon intensity of firms through the quality of
the value added. The value-added nest is a Cobb–Douglas function that combines
labour and capital. The capital could be domestic or foreign, considering the latter
environmentally cleaner than the former. Thus, when foreign direct investment (FDI)
is allowed, the production technology switched from a “dirty” (domestic capital) to a
relatively “clean” (foreign capital) one in terms of its carbon emissions. These latent
clean technologies are allowed in strategic sectors, such as Energy and Industry, but
their implementation is not costless in terms of required exports. Figure 1 illustrates
this production function tree that we have described.
Households. Households, rich and poor, consume domestic and imported goods
and services, invest and buy/sell bonds in a constant proportion of their income
(Cobb–Douglas assumption). Their incomes consist of labour and capital remunerations and of transfers received from the government and the rest of the world.
Thus, each type of household maximizes its utility function subject to its budget
constraints finding the optimal composition of its consumption basket of final goods
and services. Like in the intermediate consumption of firms, the two-level nested
final consumption demand of households assumes a first nest between EGS and nonEGS products (Cobb–Douglas assumption) and, then, a higher degree of substitution
between domestic and imported EGS, since the latter are considered environmentally cleaner (CES). This characteristic of the final demand tree makes it possible to
introduce a mechanism to green the economy through final consumption decisions.
Figure 2 illustrates this demand function tree described above.
Government. The government also consumes, invests and makes transfers to
households in a constant proportion (Cobb–Douglas), financing those expenses
mainly with its tax collection (tariffs, labour and capital taxes, output taxes, carbon
taxes) and debt in a lower proportion. In this sense, the modelling of the government
behaviour is neutral because each dollar received by the government is always spent
in the same way. Moreover, keeping the same level of revenues and expenses, the
M. P. Ramos and O. O. Chisari
given the sectoral aggregation of this multi-sector economy in 6 sectors, such as Agriculture and Fishing as an aggregate, the small open economy assumption remains
realistic, since Argentina could not influence prices at that level of sector aggregation.
Based on these six sectors, we identify Argentina’s production/consumption patterns
and the sectors’ carbon intensity. The agents that interact in the model are these singlecommodity firms, two types of households—rich and poor—, the government and
the rest of the world. Below we describe the main assumption of agents’ behaviour
and closure of the model.
Firms. A representative firm of each sector maximizes its profits subject to the
production function of a single commodity. The production function nests inputs and
value added in the first level in a fixed proportion (Leontief’s assumption). Then, two
mechanisms that could reduce carbon emissions are modelled in the further nests
of the production function. First, for inputs, we assume a two-level nest, where,
in the first level, EGS and non-EGS inputs are combined according to a Cobb–
Douglas assumption and then, only the EGS products show, in the second nest, a
greater substitution between domestic and imported—assumed relatively cleaner—
EGS products (Constant Elasticity of Substitution—CES—assumption). The second
mechanism consists of reducing the carbon intensity of firms through the quality of
the value added. The value-added nest is a Cobb–Douglas function that combines
labour and capital. The capital could be domestic or foreign, considering the latter
environmentally cleaner than the former. Thus, when foreign direct investment (FDI)
is allowed, the production technology switched from a “dirty” (domestic capital) to a
relatively “clean” (foreign capital) one in terms of its carbon emissions. These latent
clean technologies are allowed in strategic sectors, such as Energy and Industry, but
their implementation is not costless in terms of required exports. Figure 1 illustrates
this production function tree that we have described.
Households. Households, rich and poor, consume domestic and imported goods
and services, invest and buy/sell bonds in a constant proportion of their income
(Cobb–Douglas assumption). Their incomes consist of labour and capital remunerations and of transfers received from the government and the rest of the world.
Thus, each type of household maximizes its utility function subject to its budget
constraints finding the optimal composition of its consumption basket of final goods
and services. Like in the intermediate consumption of firms, the two-level nested
final consumption demand of households assumes a first nest between EGS and nonEGS products (Cobb–Douglas assumption) and, then, a higher degree of substitution
between domestic and imported EGS, since the latter are considered environmentally cleaner (CES). This characteristic of the final demand tree makes it possible to
introduce a mechanism to green the economy through final consumption decisions.
Figure 2 illustrates this demand function tree described above.
Government. The government also consumes, invests and makes transfers to
households in a constant proportion (Cobb–Douglas), financing those expenses
mainly with its tax collection (tariffs, labour and capital taxes, output taxes, carbon
taxes) and debt in a lower proportion. In this sense, the modelling of the government
behaviour is neutral because each dollar received by the government is always spent
in the same way. Moreover, keeping the same level of revenues and expenses, the