An Introduction to the Economic Projection and Policy Analysis (EPPA) model

Transcription

1 An Introduction to the Economic Projection and Policy Analysis (EPPA) model October, 2014 EPPA Training Session Massachusetts Institute of Technology Sunday River, ME

2 Outline 1. Overview of EPPA and the IGSM 2. General equilibrium models 3. A social accounting matrix 4. The EPPA model 5. Aggregation in the EPPA model 6. Biofuel production 2

3 The Emissions Prediction and Policy Model (EPPA) and the Integrated Global System Model (IGSM) 3

4 General equilibrium models Characterize producer and consumer behavior based on economic theory Consider equilibrium in all markets Explicitly model interrelationships between different markets and different sectors Include markets that mediate behavior of economic agents (e.g., prices adjust until supply and demand are equal) Built on a Social Accounting Matrix (SAM) Represents flows of all economic transactions that take place within an economy Matrix representation of national accounts 4

5 General equilibrium models 5

6 A Social Accounting Matrix 6

7 A Social Accounting Matrix 7

8 A Social Accounting Matrix 8

9 A Social Accounting Matrix Biomass Forestry Food crops Livestock Crop land Grass land Forest land 9

10 Prices and Quantities In CGE Observed data for the SAM, from National Income and Product Account data, are expenditures in $$ How do you add together apples and oranges as an economist? 1 ton of apples + 3 tons of oranges = 4 tons of fruit 1 ton of apples *$100/ton + 3 tons of oranges * $300/ton = $1000 of fruit Implications: We don t have acres of land, barrels of oil, tons of coal, number of workers We have expenditures on things. Environmental effects emissions, illness cases, etc. are based on physical accounts we need to create Supplemental Physical Accounts, or one way or another relate engineering, agronomic, epidemiology effects as we understand from physical relationships to economic data Further Implications: NO! Prices are arbitrary in the benchmark data we choose them all to be one, and then the quantity is just the total expenditure 10

11 The EPPA model Computable General Equilibrium (CGE) model of the world economy with regional and sectoral detail Fully treats demand/supply, capital/investment, and trade implications of growth, policies, and alternative technologies Alternative energy technologies and energy sources compete with conventional energy 11

12 Aggregation in the EPPA model (new in EPPA6) Regions Industries Production factors United States Crops Capital Canada Livestock Labor Japan Forestry Coal resources Australia-New Zealand Food Oil resources European Union Coal Oil Shale Eastern Europe Crude Oil Oil Sands Russia plus Refined Oil Gas resources Mexico Gas Tight gas* China Electricity Coal bed methane* India Energy Intensive Industry Shale Gas* East Asia, Korea, Indonesia Other Industry Crop land Rest of Asia Services Harvested Forest land Africa Commercial Transportation Natural forest land Middle East Household Transportation Managed pasture Brazil Dwellings Natural grass land Latin America *US only 12

13 Aggregation in the EPPA model Regions United States Canada Japan Australia-New Zealand European Union Eastern Europe Russia plus Mexico China India East Asia, Korea, Indonesia Rest of Asia Africa Middle East Industries Crops Livestock Forestry Food Coal Crude Oil Refined Oil Gas Electricity Energy Intensive Industry Other Industry Services Commercial Transportation Household Transportation Coal Gas Refined oil Hydro Nuclear Wind Solar Biomass NGCC NGCC w/ccs Coal w/ccs Brazil Dwellings Latin America 13

14 Aggregation in the EPPA model Regions United States Canada Japan Australia-New Zealand European Union Eastern Europe Russia plus Mexico China India East Asia, Korea, Indonesia Industries Crops Livestock Forestry Food Coal Crude Oil Refined Oil Gas Electricity Energy Intensive Industry Other Industry Conventional gas Gas from shale Tight Gas Coal Bed Methane Rest of Asia Africa Middle East Brazil Services Commercial Transportation Household Transportation Dwellings Latin America 14

15 Aggregation in the EPPA model Regions United States Canada Japan Australia-New Zealand European Union Eastern Europe Russia plus Mexico China India East Asia, Korea, Indonesia Industries Crops Livestock Forestry Food Coal Crude Oil Refined Oil Gas Electricity Energy Intensive Industry Other Industry Rest of Asia Africa Middle East Brazil Latin America Services Commercial Transportation Household Transportation Dwellings ICE vehicles Plug-in hybrids Electric vehicles CNG vehicles 15

16 Aggregation in the EPPA model Regions United States Canada Japan Australia-New Zealand European Union Eastern Europe Russia plus Mexico China India East Asia, Korea, Indonesia Industries Crops Livestock Forestry Food Coal Crude Oil Refined Oil Gas Electricity Energy Intensive Industry Other Industry Conventional crude Oil from shale Oil sands Rest of Asia Africa Middle East Brazil Services Commercial Transportation Household Transportation Dwellings Latin America 16

17 Aggregation in the EPPA model Regions United States Canada Japan Australia-New Zealand European Union Eastern Europe Russia plus Mexico China India East Asia, Korea, Indonesia Industries Crops Livestock Forestry Food Coal Crude Oil Refined Oil Gas Electricity Energy Intensive Industry Other Industry 1 st gen biofuels Thermochemical Biochemical Rest of Asia Africa Middle East Brazil Services Commercial Transportation Household Transportation Dwellings Latin America 17

18 Aggregation in the EPPA model Regions United States Canada Japan Australia-New Zealand European Union Eastern Europe Russia plus Mexico China India East Asia, Korea, Indonesia Industries Crops Livestock Forestry Food Coal Crude Oil Refined Oil Gas Electricity Energy Intensive Industry Other Industry Diesel Gasoline Refinery Gases Heavy Oil Other Products Coke Rest of Asia Africa Middle East Brazil Services Commercial Transportation Household Transportation Dwellings Latin America 18

19 Aggregation in the EPPA model Regions United States Canada Japan Australia-New Zealand European Union Eastern Europe Russia plus Mexico China India East Asia Rest of Asia Africa Industries Crops Livestock Forestry Food Coal Crude Oil Refined Oil Gas Electricity Energy Intensive Industry Other Industry Services Commercial Transportation Corn Sugar beet Sugar cane Wheat Palm fruit Rapeseed Soybean Middle East Household Transportation Brazil Latin America 19

20 Aggregation in the EPPA model Regions Industries Production factors United States Crops Capital Canada Livestock Labor Japan Forestry Coal resources Australia-New Zealand Food Oil resources European Union Coal Oil Shale Eastern Europe Crude Oil Oil Sands Russia plus Refined Oil Gas resources Mexico Gas Tight gas* China Electricity Coal bed methane* India Energy Intensive Industry Shale Gas* East Asia, Korea, Indonesia Other Industry Crop land Rest of Asia Services Harvested Forest land Africa Commercial Transportation Natural forest land Middle East Household Transportation Managed pasture Brazil Dwellings Natural grass land Latin America *US only 20

21 A Static Model Key Inputs and Data Observed data for the SAM, from National Income and Product Account data, are expenditures in $$ The SAM gives us levels of activities in the base year and factor shares from the I-O structure intermediate input shares. Share parameters Leontief fixed coefficient production block components Constant Elasticity of Substitution production Components Industry, Households, Trade, Government Household Production Armington and Heckscher-Ohlin Trade Government a relative passive actor taxing, consuming, transfers GDP, GNP, NNP, Welfare See Reilly, Green Growth and the Efficient Use of Natural Resources, Report

22 A Static Model Solution The static model will reproduce the benchmark data exactly. The Equilibrium Concept Disequilibrium in the Benchmark data Short Run equilibrium Run as a dynamic model we are never really in long run equilibrium Analysis with a Static model Counterfactuals. What would have been the case in benchmark year of 2007 if there had been a carbon tax or??? 22

23 Elements of the Dynamic Model Population Growth labor force growth demand growth. Savings, Investment, Capital Accumulation Depletion of Resources, Limited annual flows of Renewable Resources, graded resources Technological Change Labor Productivity Improvement. Land Productivity Improvement Energy Productivity Improvement Autonomous Energy Efficiency Improvement (AEEI) Explicit Advanced Technologies 23

24 Technical Change Versus Substitution Input 1 e.g. energy Q of input 1 Technology 1 Technology 2 Technology 3 Ratio of prices Production isoquant technical ability to substitute one input for another Technology 4 Q of input 2 Input 2 e.g. capital 24

25 Technology Penetration Many observations of high price at initial commercialization that falls over time/with more production, S-shaped penetration Learning.. R&D that improves technology Patent/intellectual property rents Bottlenecks to expansion, limited expertise for construction of factories/plants EPPA approach is to specify a long run nth plant cost, bottlenecks, and rents Represented as a technology-specific, fixed factor input. Necessary for production, initial scarcity generates rents. Allow substitution for other inputs Fixed factor grows as a function of previous period production, eventually becoming non-limiting..rents to zero 25

26 VALUE- ADDED IMPORTS DOMESTIC PRODUCTION exposure. The model calculates the service, labor and leisure e costs of all impact categories (often Expanding referred s p to a h al t h the endoi nt Accounts s in ei dem iological for literature). Non-Market We call the modified Activities model EPPA-HE (EPPA Health Effects). 1 2 j n Mitigation of Pollution Health Effects Labor-Leisure Choice 1 2 : i : Medical Services for Health Pollution Medical Services n 1 2 : i : n LEISURE Leisure Labor Labor Labor Capital Indirect Taxes Resources INPUT INTERMEDIATE USE HOUSEHOLD SERVICES Consumption Health Services Leisure Investment FINAL USE Government Purchase Net-export OUTPUT Figure 1. Social Accounting Matrix for EPPA-HE. Source: Nam et al. (2010), p This strategy has been used to represent household transportation, In each time period between 1970 and 2005, for each pollutant, the model calculates the health, recreation..key is valuing leisure (non-paid work) time. Household number of production cases of every function health outcome, is a formulation given a pollution originally level due and to the Gary number Becker of people (and a exposed to Nobel each pollutant. prize). Once the number of cases is computed, the model then calculates corresponding costs, determined by health service inputs, lost labor, and leisure time needed to 26

27 Model Solution MPSGE Mixed Complementarity Algorithm Not an explicit welfare maximization Solves for prices that equate supply and demand for all goods, inputs, factors. Under perfect competition, no distortion conditions this is equivalent to a profit maximization. But distortions such as taxes exist, Armington trade, and of course uncontrolled pollution Recursive dynamic---myopic expectations; Fully dynamic perfect foresight The CES Function Special cases and Nests 27

28 Example 1: Biofuel crop production Biofuel crop Co-products Crop Resource-intensive S σ R KL Capital-Labor S S σ L EM σ K L Land Energy-Materials Capital Labor Aggregate energy S σ E M Intermediate inputs S S σ E OE σ I Electricity Other energy Input 1.. Input N S σ OE Coal Oil Gas Refined oil 28

29 Example 2: Biofuel production w/ Fixed Factor Biofuel Inputs-Fuel S σ FF Fixed factor K-L-Intermediates S σ KLI C Biofuel crop Capital-Labor S σ KL I Intermediate inputs S S σ K L σ I Capital Labor Input 1.. Input N 29

30 Example 3: Crediting system for RINs in Biofuels it Fuel Permit 1 gal. 1 Fuel 1 gal. 1 gal. Biofuel α Permit 1 gal. Fuel α Per 30

31 Example 4: Land conversion Timber 1 ha land type y 1 ha land type x σ ff Fixed factor capital labor Intermediate inputs Energy aggregate Cost of conversion 31