Here’s an article on how water, energy, and food fit into macroeconomic models. My basic understanding is that traditionally, they don’t. Production functions focus on labor and capital because these are assumed to explain most of the output, and including water, energy, raw material, and even land prices does not make enough difference to bother with. So the methods exist, but economists generally don’t bother because historical data shows these things don’t make a difference. We have certainly seen short-term and regional price shocks in food and energy that have affected economies. We haven’t really seen a sustained, long-term rise in prices of water, energy, or food, in fact the long term trend has been clearly the opposite. Will climate change begin to reverse this at some point? Or is it already happening but our technology is keeping up? Or is it happening slowly, we are adjusting, but the system is becoming more fragile and we are headed for a sudden panic at some point? Like dead wood building up in a forest – the forest may look okay for a long time, and then one day there is a spark, followed by an intense crisis, and then you are left with ashes…
The paper analyses how the Water-Energy-Food Nexus is treated in Computable General Equilibrium (CGE) models, discussing their design, importance and possible ways of improvement. The analysis of their structure is critical for evaluating their potential efficiency in understanding the Nexus, which will be particularly effective for gauging the importance of the topic, the reciprocal dependency of its elements and the expected macroeconomic, demographic and climatic pressures that will act on its components. General equilibrium models can be useful devices to this end, as they are specifically built to track interdependencies and transmission effects across sectors and countries. Nevertheless, the review showed that most CGEs in the literature struggle to represent the competing water uses across sectors and, in particular, those concerning the energy sector. Therefore, it highlights the need to resolve this issue as a necessary step toward improving future research.
Environmental Modeling and Software