1. Regional Modeling and Linking Sector Models with CGE Models
Presented by Martin T. Ross
Environmental and Natural Resource Economics Program
RTI International at
Third Forestry and Agriculture Greenhouse Gas Modeling Forum
October 12-15, 2004
Shepherdstown, WV

2. Overview of Presentation
Uses of Computable General Equilibrium (CGE) Models
Overview of ADAGE Model
Issues Associated with Regional Modeling
Linkages with Detailed Sector Models
Electricity Dispatch Models
Agriculture and Forestry Models
Difficult Issues and CGE Data Requirements

3. Uses of CGE Models
Combine Economic Theory and Empirical Data to Cover All Aspects of Economic Behavior
Broad Representation of Technologies
CGE Models can’t Incorporate All Features of Agriculture/Forestry Models
Uses Include:
Macroeconomic policy effects
Interactions of agriculture/forestry and energy
Leakage issues
Provide information to detailed sector models

4. Overview of ADAGE Model (Applied Dynamic Analysis of the Global Economy)
Dynamic, Intertemporally-Optimizing Model
Rational consumers with foresight who maximize utility
Typically has around 5 regions and industries
Solves in 5-year intervals (2005 to 2050/2075)
Production Structures
Nested CES functions and associated elasticities
Other than electricity, based on MIT model structure
Baseline Uses EIA’s AEO & IEO Energy Forecasts
Carbon Dioxide Emissions Tied to Fuel Use in BTUs
Non-CO2 Emissions (CH4, N2O, HFC, PFC, SF6)
MIT approach (endogenous modeling, input to sectors)
EPA forecasts by gas and sector

5. Overview of ADAGE Model

6. General Issues of Regional CGE Modeling
Establishing Interstate Trade Patterns
Commodity Flow Survey data
Gravity Trade: trade = f(income,distance)
Modeling Trade in Goods
Armington (goods are differentiated by source)
Homogeneous, or identical, goods
Estimation of State-Level Results
Regional model of US => results to states
Model single state and surrounding regions

7. General Issues of Regional CGE Modeling
Feasible Changes in Production
Electricity generation – e.g., total potential wind or biomass, penetration rate of new technology
Land use and values, also potential crops
Constraints on Electricity Flows
IPM data on transmission links
EIA data on congestion points in system

8. Linkages with Sector Models: Policy Modeling
GHG Policy Modeling
Carbon – emissions tied to fuel use
Look at heatrate (BTU/kWh) and how fast technology change occurs
Other Types of Emissions Policies (SO2, NOx)
No direct link between fuel use and emissions
Fuel switching & retrofits to reduce emissions (options and costs are unit specific)
Link to detailed electricity dispatch model

9. Approaches to Linking Models (CGE & Electricity Sector Models)
Indirect Linkage
Use sector model’s cost estimates, let CGE model structure determine changes in electricity prices, fuel use, etc.
Direct Linkage
Force CGE model to replicate other results (electricity price, coal/gas use and prices)
Removal of Electricity Sector in CGE Model
Rely on detailed model for all electricity results
Need iterative solves passed between models to reach a consistent equilibrium

10. Links with Ag/Forestry Models
Response Functions
(McCarl/Sands work with ASM/FASOM & SGM)
Express Relationship among Sequestration, Afforestation, Biofuels and Carbon Prices
Repeated Simulations of Ag/Forestry Models
Carbon and fuel prices
Commodity demands
Trade flows, etc.
Incorporate in Relationship in CGE Model

11. Links with Ag/Forestry Models
Endogenize Land Reactions in CGE Model
(GTAP, FARM, MiniCAM/AgLU, MIT, GTEM)
GOAL: represent broad reactions of ag/forest sectors in CGE model, if not the details
Land is input to production
GTAP and EPA development of data by AEZ
Allows modeling of competition for land among uses and shifts in rental values
Need ag/forestry sector results to inform CGE model structure
* Differences between Static and Dynamic Models

12. Endogenizing Land in CGE Models

13. Difficult Issues With Endogenous Modeling
How to Model Land
Land rents – flow variable (from data)
Land stocks – tied to carbon levels
Past Land Uses
Implications for carbon stocks
(Tracking multiple land stocks, similar to capital?)
Rising Marginal Costs of Land Conversion
Technology parameter changes
Decreasing returns to scale through fixed input

14. Dynamic Issues of Land Modeling
“Saturation” and Impermanence
Management Intensity and Rotations
Harvesting Decisions
Long-term Reactions Depend on Foresight
Used by sector models like FASOM and TSM
Without foresight, may be difficult for agents in a CGE model to consider these dynamic issues when adjusting behaviors

15. Links with Ag/Forestry Models
Direct Links to Ag/Forestry Models
(Sohngen/Mendelsohn and DICE/RICE model)
Coordinate Baselines and Reactions
Pass Information between Models
GHG permit price
Land rental values
Energy consumption and prices
Demand for ag/forestry products by industries and households accounting for changes in prices and income

16. Data Requirements Current Land Rents by Crop and Region
Current Acres by Crop and Region
(Probably have to estimate state shares)
Baseline Estimates of Future Changes
Crop production, rents, acres
Urbanization
Costs, Conversion Emissions, Feasible Land Transformations and Output, and Sequestration Potential