A CGE Model for Lithuania: The Future of Nuclear Energy
Arvydas Galinis, Lithuanian Energy Institute Marko J. van Leeuwen, SEO, University of Amsterdam
Awareness in Central and Eastern European countries of environmental problems is growing rapidly. Yet the social, economic, and political barriers to implementing drastic
policy measures are still formidable. The acceptability of policy measures can be improved when the environmental and economic implications of alternative measures are shown in
conjunction. Therefore, a prototype Computable General Equilibrium CGE model is constructed for Lithuania. A key question in Lithuania concerns the future use of nuclear-
generated power. Using the CGE model, medium-term scenarios describing combinations of high or low economic activity, fuel prices, and nuclear potential are run for the year
2000.
2000 Society for Policy Modeling. Published by Elsevier Science Inc.
Key Words: Equilibrium modeling; Energy policy; Pollution; Sustainability, Lithuania.
1. INTRODUCTION
In this article we describe a “Computable General Equilibrium model for Lithuania” CGE-LI model, constructed at the Lithua-
nian Energy Institute LEI and the Foundation for Economic Research SEO of the University of Amersterdam. This multisec-
tor macroeconomic model can be used to study the medium and long-term effects of policy measures on economic and environ-
mental. The model consists of four major blocks, i.e., production, consumption, foreign trade, and environment. The energy sectors
Address correspondence to M.J. van Leeuwen, University of Amsterdam, SEO, Roeters- staat 11, 1018 WB Amsterdam, The Netherlands.
Arvydas Galinis is Senior Research Associate at the Lithuanian Energy Institute LEI, Kaunas, Lithuania, and Marko van Leeuwen is Senior Research Fellow at the SEO,
Foundation for Economic Research of the University of Amsterdam, The Netherlands. The project is sponsored by the PhareACE program, project No. P95-2049-R. The support
is gratefully acknowledged. Received July 1997; final draft accepted February 1998.
Journal of Policy Modeling 226:691–718 2000
2000 Society for Policy Modeling
0161-893800–see front matter Published by Elsevier Science Inc.
PII S0161-89389800028-3
692 A. Galinis and M. J. van Leeuwen
and the production, consumption, and trade of energy products are intertwined with all the blocks of the model. The environmen-
tal block distinguishes between three types of emission gases CO
2
, SO
2
, and NO
x
, of which a maximum output level can be imposed and abatement costs can be calculated. Furthermore, a basic con-
cept of tradable emission permits is introduced. Lithuania is the biggest of the three Baltic states sharing a
border with Latvia, Belarus, Poland, and with the Kaliningrad region of the Russian Federation, as well having a 99-km coast
line. Lithuania is contrary to Western perception, quite different from the other Baltic States in language, culture, and history. Its
area is 65.3 thousand km
2
, with a population of 3.7 million people. In the last 2 centuries Lithuania was made a part of its Eastern
neighbor. For almost half a century Lithuania was fully integrated into the Former Soviet Union FSU and had to live under its
centrally planned system.
Lithuania has been in transition to a free market economy since the first days of regained independence in 1990, has become a
democratic state, and has started to implement comprehensive reforms. One of the main foreign policy goals is to join the Euro-
pean Union EU. In moving in this direction it became an associ- ate member of the EU in June 1995.
Lithuania has followed a Polish-like shock transition path with tight monetary stability and with reducing the rate of inflation as
its main goals, following exhortations of the IMF and the World Bank. The first stage of the transition process showed successful
privatization, and has invited foreign investors to participate in several large-scaled infrastructural and rehabilitation projects.
However, up to 1995 the inflow of foreign capital was disappoint- ingly low: less than 200 million of foreign direct investments
FDI, which is merely 1.7 percent of GDP. The economy recov- ered strongly in 1996 and the first half of 1997 after the banking
crisis of late 1995: growth accelerated, inflation kept falling, and unemployment decreased.
1A. Status of the Lithuanian Economy
The real Gross Domestic Product GDP grew steadily until 1989. Yearly GDP growth rates since 1985 are shown in Figure
1. In 1990, the GDP level was estimated, by World Bank experts and the Lithuanian Ministry of Economic Affair, at 2,133 to 2,370
ECU per capita. At the end of 1993, real GDP dropped to 40
A CGE MODEL FOR LITHUANIA 693
Figure 1. Real GDP growth in Lithuania, 1985–96.
percent of the 1990 value, and industrial output in 1993 has halved and during 1994—it decreased further by 32 percent. The decline
lasted until 1994, when GDP finally increased again by 1 percent. The decline of the Lithuanian economic activity in the beginning
of the transition period is huge, and more severe than in the other East European countries, mainly due to the tight interlinkage with
the economies of the republics of FSU.
1
The national currency, the Litas, was introduced in the middle of 1993. To forestall a general crisis of confidence in the economy
and to curb inflation the Litas was pegged to the dollar 4 Litas 5 1. The fixed exchange rate was maintained through a tight mone-
tary policy. To reach long-term fiscal sustainability VAT exemp- tion were eliminated in 1997, and a 18 percent rate was introduced
for all goods and most services. Also, excise duties on alcohol and tobacco were sharply increased. On the expenditure side, the
pension system was reformed by raising the retirement age and restricting indexation, and except for the low-income households,
energy subsidies will be eliminated. Further measures will be needed, though, to achieve a financial viable government sector.
In 1990 about 95 percent of Lithuanian trade was with the FSU; now this share is drastically reduced and represents no more than
1
The rapid and large decrease of the GDP during the 1991–93 period seems to be overstated due to the growth of the shadow economy. Many economists have their doubts
about the real magnitude of this decrease in industrial output. They think the output figures are too low as producers try to hide a part of their activities to avoid taxes, some
production gets foreign labels, etc.
694 A. Galinis and M. J. van Leeuwen
45 percent. A rapid increase of energy and raw material prices in 1992 resulted in a loss of former export markets for manufacturing
goods as prices for energy and raw materials in the FSU were still much lower, keeping production cost low. To fill up the gap in
demand, Lithuanian producers and exporters are trying to redirect their export efforts towards neighboring countries in the west and
the EU. The move to market prices and hard currency trading has deteriorated the terms of trade, which hampers the opening
of new export markets. New important trading partners outside the FSU are Germany share in total exports of 14.4 in 1995,
The Netherlands 4.9 and Poland 3.9.
Inflation in 1992 reached 1,163 percent, but already 1 year later it decreased to 189 percent, and dropped further during the following
years, respectively, to 45.1 and 35.7 percent. In 1997, a further stabilization of prices is expected.
Unemployment is steadily increasing from 4.4 percent in 1993 to 7.4 percent in May 1995, reflecting first of all a fall in employ-
ment. In 1996, after the level of employment increased again, unemployment rates continued to rise, driven by an increase in
supply of labor. Due to the privatization, the share of public sector employment fell to just over 30 percent in 1995.
The structure of the Lithuanian economy has changed signifi- cantly during the last 5 years; the share of agriculture has decreased
sharply and the share of trade and services have grown consider- ably. Where the share of agriculture in GDP in 1990 was 27.5
percent, in 1993 it dropped to merely 11.2 percent. At the same time, share of trade in GDP almost quadrupled, from 4.9 to 17.1
percent. Also, within the industry the structure has changed dra- matically during the last 3 years. The most unstable situation is
in those industries most integrated into the former Soviet econ- omy, for example, machinery and light industry; i.e., those sectors
that were importing raw materials from the FSU and were ex- porting final products back to it.
Many branches of industry suffer from insufficient local raw materials, import constraints, obsolete equipment, and old-fash-
ioned production processes. The pulp and paper industry is in a critical state because equipment at the factory is old and worn
out. Significantly reduced cement production better reflects its real demand than previously. Earlier, the production levels were
high, producing about 1 ton of cement per capita, which is obvi- ously by far too much for internal needs only. At the same time,
the technology used in cement production was old and very energy
A CGE
MODEL FOR
LITHUANIA
695
Table 1: Main Economic Indicators of Lithuania 1991–96, Million Litas Except as Indicated
1991 1992
1993 1994
1995 1996
Inflation 383
1163 199
45.1 35.7
13.1 GDP change, constant prices
2 13.1
2 34.0
2 30.0
1.0 3.0
3.6 Industrial production change
2 4.9
2 51.6
2 34.7
2 29.8
0.9 2
3.5 Population 31000
3,742 3,741
3,730 3,721
3,714 3,712
Active population 31000 2,128
2,120 2,108
2,102 2,111
Active population of total 56.9
56.7 56.5
56.5 56.8
Employed persons 31000 1,898
1,855 1,778
1,675 1,643
1,659 Registered unemployment
3.0 1.3
4.4 3.8
6.1 7.1
Government revenues 12694
a
85969
b
2,739 4,042
5,758 6,720
Government expenditures 11142
a
81132
b
2,646 4,355
6,199 7,510
Budget deficit 1552
a
4837
b
93 2
313 2
438,8 2
790,0 Gross external dept million
— —
894 1,100
821 Exports
12300
a
107754
b
8,707 8,077
10,820 13,420
Imports 8729
a
77143
b
9,798 9,355
14,594 18,235
Trade balance 3571
a
30611
b
2 1,091
2 1,278
2 3,774
2 4,815
Current account million —
— 2
84 2
160 2
50 2
400 Long-term interest rate average
— —
47.7 32.5
18.3 12.3
Exchange rate Litas, ultimo —
3.79 3.90
4.00 4.00
4.00 Exchange rate LtDEM
— —
— 2.46
2.79 Gross foreign debt bn
— —
— 0.5
0.8 1.2
Source: Lithuanian Department of Statistics 1996a, 1996b, 1996c, European Union 1996a, 1996b, 1997, IMF 1996, OECD 1996.
a
Roubles;
b
talonus.
696 A. Galinis and M. J. van Leeuwen
Figure 2. Share of costs of fuels and other energy inputs in total production costs.
intensive; therefore, cement produced in Lithuania could not and still cannot compete on international markets, resulting in a poor
export performance and overcapacity. The two largest sectors of the national economy are industry
29 of GDP in 1995 and trade 23 of GDP in 1995. Within the industrial sector the main branches are food processing, ma-
chinery, and light industry. More details on the structure of the Lithuanian economy can be found in the inputoutput table shown
in the appendix.
A significant and probably determining role in the reduction of industrial output and restructuring of the economy was played
by fuel and energy prices, which increased rapidly in 1992. The share of fuel and energy in total production costs has increased
significantly, as is shown in Figure 2 for 1990 and 1993.
Many industrial enterprises were operated below full or even normal capacity, resulting in a strong under utilization of their
equipment. Because during the last 3 years the decrease of indus- trial output was higher than that of industrial energy demand
including the demand for electricity, industrial energy intensity has grown further, and is significantly higher than in Western
countries. On average, in Lithuania in 1990, two to three times more energy was needed to produce one unit output compared
to Western standards. More details on energy use are given in the next section.
A CGE MODEL FOR LITHUANIA 697
Figure 3. Structure of final energy consumption in Lithuania, 1990–95.
1B. Energy Demand
Analyzing final consumption of different energy carriers elec- tricity, heat, natural gas, and fuels one notices that the final
electricity consumption decreased from 12 TWh in 1990 to 7 TWh in 1995. District heat consumption almost halved, and was 13.6
TWh in 1995, final consumption of fuels decreased from 247 PJ in 1990 to 130 PJ in 1995. Analysis of the final energy demand
by sectors shows a sharp decrease in the shares of agriculture, construction, and industry Figure 3. The shares of final energy
consumption in these sectors dropped in 1995, correspondingly to 23 and 36 percent of the 1990 value. The shares of trade and
services and transport increased slightly. Energy demand in house- holds fell much less to 88 percent of the 1990 value. Therefore,
its share in total energy demand increased sharply—from 21 per- cent in 1990 to 34 percent in 1995.
Structural changes in energy consumption in the sectors of the economy mentioned above have caused a growth of energy inten-
sity, i.e., the final energy consumed per unit of GDP in Lithuania increased during the transition period. One can see a positive
point though: since 1993, the energy efficiency has also increased slightly.
In 1990, primary energy use per capita in Lithuania mounted to 190 GJ, which is only slightly lower than in most other West
European countries. However, primary energy consumption per unit of GDP was 80 GJECU, indicating a high energy intensity
in Lithuania measured in terms of economic development. One
698 A. Galinis and M. J. van Leeuwen
of the worst points in the former socioeconomic system was the huge waste of energy. The excessive use of energy resources was
caused by: a very low energy prices; b inadequate or nonexis- tent metering and control of energy use; c lack of incentives for
energy efficiency; and d poor buildings insulation.
To improve the unsustainable situation the Lithuanian govern- ment has prepared the National Energy Strategy and the National
Efficiency Improvement Program, where main directions of en- ergy sector reconstruction are foreseen.
Although Lithuania has very limited domestic energy resources, with indigenous energy supplying only about 7 percent of the total
domestic energy demand, it is in a vulnerable position. The supply security is low, and the dependence on exogenous shock in world
market prices is high. The country possesses only modest oil re- sources. Renewables like hydro, wind, biogas, geothermal, and
solar energy are likely to have only limited future potential for Lithuania.
Peat is probably the indigenous resource with the largest theo- retical potential. Total geological reserves of peat in Lithuania
are estimated to be 9,200 PJ, of which 500 PJ can currently econom- ically and feasibly be explored. Furthermore, there are 1.8 million
hectares of forest in Lithuania. It is estimated that it would be possible to produce about 3.5 million m
3
of wood for fuel, which corresponds to 20 PJ, if all reserves of the forests are used in the
future. Natural gas has been used in Lithuania since 1961, when a gas pipeline from Ukraine was built. At present, less than 40
percent of the dwellings in Lithuania are connected to the gas network. A major part of natural gas in the household is used for
cooking. In 1990, the share of natural gas reached 27 percent in the primary energy balance.
Since 1984, when the first unit at the Ignalina Nuclear Power Plant INPP was commissioned, the role of nuclear energy in-
creased sharply. The production in PJ declined strongly during the first years of the transition period, mainly as a consequence
of the sharp decline in the overall energy demand. Its share in the primary energy balance steadily increased, and from 23 percent
163.7 PJ in 1990 it reached 31 percent 113.6 PJ in 1995 see Table 2.
1C. Environment and Safety
As is well known, the global environmental situation has been giving rise to some concern. Environmental problems like the
A CGE MODEL FOR LITHUANIA 699
Table 2: Primary Energy Balance, PJ 1985–95
1985 1990
1991 1992
1993 1994
1995
Total primary energy 672.3
708.7 738.2
472.3 373.7
328.5 363.1
Oil and oil products 375.1
303.7 335.8
181.2 157.9
149.1 132.1
Natural gas 151.3
195.8 202.6
115.8 62.6
72.4 85.0
Coal 35.0
28.6 19.7
16.7 16.2
13.6 13.2
Wood and peat 18.5
15.5 15.4
16.8 17.7
17.7 17.9
Hydro 1.4
1.5 1.2
1.1 1.4
1.6 1.3
Nuclear 91.1
163.7 163.4
140.7 117.8
74.1 113.6
Source: Lithuanian Energy Institute 1996, own calculations.
greenhouse gas effect, depletion of the ozone layer, and acidifica- tion could be a burden on both the current and the future genera-
tions. The huge emissions of greenhouse gases and other sub- stances, for example, CO
2
, CO, NH
3
, NO
x
, SO
2
and VOCs, seem to be causing considerable environmental damage. For example,
a doubling of carbon emissions in the atmosphere is expected to lead to a temperature rise of anywhere between 1.5 and 4.58C. In
turn, this is expected to influence the world climate, especially creating regional changes influencing agricultural output and caus-
ing a sea level rise. In the case of Lithuania, we can add to these problems related with the use of nuclear power. More than 80
percent of electricity in Lithuania is generated using nuclear fuel.
At present, most governments realize that some form of sustain- able development has ultimately to be achieved. This idea implies
implementation of policy measures to reduce the current and future environmental threats. There is a continuous flow of inter-
national conferences, scientific research projects, policy proposals, protocols, and laws—on a national and international level—with
the main issue of how to realize a sustainable development. What fuel mix and which economic structure should be persuade to
achieve a sustainable development of the Lithuanian economy?
Environmental emissions in Lithuania are not as severe as in other countries that are in transition to a free market system
compare, e.g., the situation in Poland. However, the levels of emissions are not low enough to conform to current EU standards,
mainly due to the high energy intensity and low energy efficiency.
Due to the existence of the Ignalina Nuclear Power Plant INPP, overall CO
2
and SO
2
emission levels are low compared with other countries in transition. The total level of CO
2
emissions
700 A. Galinis and M. J. van Leeuwen
Table 3: National Annual Total Emissions Kton, 1985–95
1985 1990
1991 1992
1993 1994
1995
CO
2
,31000 45
42 45
29 25
25 25
SO
2
304 222
234 139
125 117
107 NO
x
166 158
166 98
78 77
60 VOC
124 116
122 76
62 62
68 Particulates
70 60
50 28
19 17
14 Source: Lithuanian Ministry of Enviornment Protection 1996.
was 42 Mton in 1990, and about 25 Mton in 1995. Sulphur dioxide emissions in 1990 were 222 Kton, corresponding to 59 kg per
capita per year, still quite high if compared the range of 20–45 kg per capita across EU countries. During the transition period
SO
2
emissions decreased with almost 50 percent. One can notice the especially large reduction of SO
2
in electricity production power sector, because the share of nuclear generation increased
from 60 percent in 1990 to 87 percent in 1995. Nitrogen oxides emissions in 1990 were 158 Kton. The highest proportion 51
was due to activity in the transport sector. In connection with changes in the economy and reduction of activities in industrial
branches, the transport sector emissions of NO
x
halved during the transition period. With the increase in economic activity and the
shift towards trade and services, it is expected that NO
x
emissions will rise again unless additional policies are implemented. The
dynamics of overall emissions and present environmental situation in Lithuania are shown in Table 3.
As activity in all sectors of the economy have been increasing since 1994, levels of emissions are likely to increase if not con-
trolled. Lithuania is aiming at reaching the EU environmental standards by the beginning of the next century. From this point
of view it is very important to rehabilitate or to remove plants from service at the end of the transition period. Lithuania will
follow the new emission standards that have been adopted by the Government and is valid from 1996 Table 4. All existing plants
will either be rehabilitated to cater for the new standards or will be removed from service. New investments could be necessary to
implement the best available technologies.
Additional modification of the Lithuanian power plants is re- lated to use of orimulsion. The uncontrolled emissions of SO
2
and NO
x
when burning orimulsion are higher than in the case of heavy
A CGE
MODEL FOR
LITHUANIA
701
Table 4: Emission Targets, 1993–96
Maximum permissible concentrations, mgm
3
SO
2
NO
x
CO
2
Particulates Boiler thermal
Type of fuel capacity MW
1993 1996
1993 1996
1993 1996
1993 1996
Gas 1–50
— —
400 350
400 400
20 20
natural gas 51–300
— —
450 350
300 300
20 20
LPG .
300 —
— 500
350 200
200 20
20 Liquid fuel
1–50 3400
2700 580
450 500
500 150
110 light fuel oil
51–300 3400
2700 680
450 400
400 140
100 heavy fuel oil
. 300
3400 2700
780 450
300 300
130 90
Solid fuel 1–50
2400 1600
500 400
1200 1000
1600 700
coal, coke, oil-shale 21–50
2400 1200
650 400
1000 800
1300 500
peat, straw, wood .
50 2400
800 650
400 900
700 1000
300 Source: Lithuanian Ministry of Environment Protection 1996.
702 A. Galinis and M. J. van Leeuwen
fuel oil. This shows the orimulsion burning at the Marbach power plant in Germany test data Stoubler and Maier, 1993. Therefore,
additional measures for reduction of emissions are required. The INPP plays a crucial role for the future of the Lithuanian
power sector. But safe operation of the INPP remains an important issue. The State Nuclear Safety Inspectorate VATESI in 1993
approved the plants’ Safety Improvement Programme. To support implementation of this program 13 Western European countries,
through the EBRD, allocated 33 million ECU for this purpose. The number of unplanned reactor shutdowns in 1990–95 was 28,
and number of nuclear events in IAEA scale was 8, of which 7 were according to scale 1 and 1 according to scale 2.
There was the National Environment Protection Strategy pre- pared and approved in 1995. Lithuania also signed several interna-
tional conventions: Geneva Convention on long-range Trans- boundary Air Pollution, Vienna Convention, on Liability for
Nuclear Damage Nonproliferation Treaty, Safeguards Agree- ment, Joint Protocol, Law on Liability, Convention on Protection
of Nuclear Material, etc.
2. GENERAL EQUILIBRIUM MODELING
