macroeconomic impact model overview for pennsylvania

MACROECONOMIC IMPACT MODEL OVERVIEW FOR PENNSYLVANIA

by

Adam RoseUniversity of Southern California

http://www.usc.edu/identity/license/?fn=logo_white_card.zip

Objective

• Explain macroeconomic modeling of potential climate change mitigation/sequestration options :

- Macroeconometric model (REMI)

- Data requirements

- Application


Macroeconometric Modeling

• a forecasting model that covers the entire economy, typically in a “top-down” manner, based on macroeconomic aggregate relationships such as consumption and investment.

(REMI differs in that it includes these key relationships but is based on a more bottom-up approach. In fact, it makes use of the finely-grained sectoring detail of an I-O model.)

• based on inferential statistical estimation of key parameters

• based on time series (historical) data; but also I-O data

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REMI Policy Insight Plus Model

• Structural economic forecasting and policy analysis model: - integrates I-O, CGE, econometric & econ geography methods - dynamic, with forecasts & simulations generated on annual basis - behavioral responses to wage, price, and other economic factors

• Thousands of simultaneous equations: - relatively straightforward structure. - five major blocks: 1) Output and Demand 2) Labor and Capital Demand 3) Population and Labor Supply 4) Wages, Prices and Costs 5) Market Shares

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Figure B1. REMI Model Linkages (Excluding Economic Geography Linkages)

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Figure B2. Economic Geography Linkages 6


Modeling Steps

• Test REMI Model

• Obtain data on mitigation/sequestration options

• Link data to REMI policy variables

• Simulate one option at a time

• Simulate all options together

• Analyze results7


Table 1. GHG Mitigation Options of California in 2020

Sector Climate Mitigation Actions

Estimated 2020 Annual GHG

Reduction Potential

(MMtCO2e)

Estimated Cost or

Cost Savings per

ton GHG Removed

GHG Reduction Potential as

Percentage of 2020 All-sector Baseline

Emissions

Cumulative GHG

Reduction Potential

AFW Landfill Methane Control (Discrete Early Action) 1 $1.00 0.17% 0.17%

AFW Sustainable Forest Target 5 $10.00 0.84% 1.01%

AFW Methane Capture at Large Dairies 1 $156.00 0.17% 1.17%

ES Energy Efficiency--Electricity 15.2 -$205.00 2.55% 2.55%

ES

Increase Combined Heat and Power Use by 32,000 GWh (Net reduction includes avoided transmission loss benefits) 6.9 -$190.00 1.16% 3.71%

ES Additional Natural Gas Energy Efficiency 1 -$146.00 0.17% 3.87%

ES Additional Electricity Energy Efficiency 3.8 -$145.53 0.64% 4.51%

ES Oil and Gas Extraction GHG Emission Reduction 3 -$56.67 0.50% 5.01%

ES GHG Leak Reduction from Oil and Gas Transmission 1.5 -$10.00 0.25% 5.26%

ES California Solar Program (including New Solar Homes Partnership 2.1 $0.00 0.35% 5.62%

ES Renewable Portfolio Standard (33% by 2020) 21.2 $73.40 3.55% 9.17%

ES Coal Emission Reduction Standard 8 $106.25 1.34% 10.51%

ES Expanded Solar Water Heating: 1.75 million units installed by 2020 1 $292.00 0.17% 10.68%

ES Expanded Million Solar Roofs: 5,000 MW by 2020

1.3 $776.15 0.22% 10.90%

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RCI Industrial Boiler Efficiency 1.5 -$84.67 0.25% 0.25%

RCI Refinery Energy Efficiency Process Improvement 5 -$76.60 0.84% 1.09%

RCI Stationary Internal Combustion Engine Electrification 0.2 -$65.00 0.03% 1.12%

RCI Residential Refrigeration Early Retirement Program 0.1 -$60.00 0.02% 1.14%

RCI Energy Efficiency--Natural Gas 4.2 -$52.38 0.70% 1.84%

RCI Waste Reduction in Concrete Use 1 -$28.00 0.17% 2.01%

RCI High GWP Recycling and Deposit Program 6.3 -$10.48 1.06% 3.07%

RCI Carbon Intensity Standard for Cement Manufacturers 2.5 -$1.20 0.42% 3.49%

RCI SF6 Leak Reduction and Recycling in Electrical Applications 0.1 -$1.00 0.02% 3.50%

RCI Carbon Intensity Standard for Concrete Batch Plants 3.5 $0.00 0.59% 4.09%

RCI Specifications for Commercial and Industrial Refrigeration 4 $0.15 0.67% 4.76%

RCI

SF6 Limits in Non-Utility and Non-Semiconductor Applications (Discrete Early Action) 0.3 $0.33 0.05% 4.81%

RCI Limit High GWP Use in Consumer Products (Discrete Early Action) 0.3 $0.33 0.05% 4.86%

RCI High GWP Reduction in Semiconductor Manufacturing (Discrete Early Action) 0.15 $20.00 0.03% 4.89%

RCI Alternative Suppressants in Fire Protection Systems 0.1 $20.00 0.02% 4.90%

RCI Glass Manufacturing Efficiency 0.2 $30.00 0.03% 4.94%

RCI Foam Recovery and Destruction Program 1 $100.00 0.17% 5.11%

RCI Removal of Methane Exemption from Existing Refinery Regulations 0.05 $100.00 0.01% 5.11%

RCI Residential Solar Water Heater Installation (AB1470 goal) 0.1 $2,920.00 0.02% 5.13%

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TLU Tire Pressure Program 0.82 -$767.07 0.14% 0.14%

TLU Tire Tread Standard 0.3 -$410.00 0.05% 0.19%

TLU Goods Movement Efficiency Measures 3.5 -$354.29 0.59% 0.77%

TLU Heavy-Duty Engine Efficiency 0.6 -$311.67 0.10% 0.88%

TLU Regional Performance-Based VMT Targ ets and Local Government Action 2 -$310.50 0.34% 1.21%

TLU Feebates for light duty vehicles (in addition to Pavley) 4 -$253.75 0.67% 1.88%

TLU Pavley I and II – Light-Duty Veh icle GHG Standards 31.7 -$174.24 5.32% 7.20%

TLU Medium- and Heavy-Duty Vehicle Hybridization 0.5 -$170.00 0.08% 7.28%

TLU Congestion Pricing 1 -$155.25 0.17% 7.45%

TLU Pay-as-you-drive 1 -$155.25 0.17% 7.62%

TLU Indirect Source Rules for New Development 1 -$155.25 0.17% 7.78%

TLU Programs to reduce vehicle trips 1 -$155.25 0.17% 7.95%

TLU Low Friction Engine Oils 2.8 -$155.00 0.47% 8.42%

TLU Solar-Reflective Automotive Paint and Window Glazing 0.89 -$5.62 0.15% 8.57%

TLU

Enforcement of Federal Ban on Refrigerant Release during Servicing or Dismantling of Motor Veh icle Air Conditioning Systems 0.1 $0.00 0.02% 8.59%

TLU High Speed Rail 1 $0.00 0.17% 8.75%

TLU Low Carbon Fuel Standard (Discrete Early Action) 16.5 $0.00 2.77% 11.52%

TLU Ship Electrification at Ports (Discrete Early Action) 0.2 $0.00 0.03% 11.55%

TLU

Motor Vehicle Air Conditioning Systems: Reduction of Refrigerant Emissions from Non-Professional Servicing (Discrete Early Action) 0.5 $4.80 0.08% 11.64%

TLU Low GWP Refrigerants for New Motor Veh icle Air Conditioning Systems 2.5 $6.40 0.42% 12.06%

TLU

Heavy-Duty Vehicle GHG Emission Reduction (Aerodynamic Efficiency)—(Discrete Early Action) 1.4 $457.14 0.23% 12.29%

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Table 2. Mapping “Demand-Side Management” Option into REMI Inputs

TWGs Quantification Results Policy Variable Linkage in REMI

Energy Savings of Customers

Businesses (Commercial and Industrial Sectors)

Wages, Prices, and Costs Block Fuel Costs Electricity Fuel Cost for Individual Industry (amount) Decrease

Households (Residential Sector)

Wages, Prices, and Costs Block Prices (housing and consumer) Consumer Price (equivalent currency amount) Household Operation Decrease

Electricity Demand Decrease from the Utility Sector

Electricity Sector) Output Block Industry Demand Exogenous Final Demand (amount) for Utilities sector Decrease

Energy Customer Outlay on Energy Efficiency (EE) Goods


Wages, Prices, and Costs Block Production Cost (amount) for the all the REMI sectors Increase


Output Block Consumer Spending (amount) Computers and Appliances Increase Output Block Consumption Reallocation (amount) All Consumption Sectors Decrease

Paying for the EE Program (Ratepayer Costs)


Wages, Prices, and Costs Block Fuel Costs Electricity Fuel Cost (amount) Increase


Output Block Consumer Spending (amount) Household Operation Increase Output Block Consumption Reallocation (amount) All Consumption Sectors Decrease

Investment in EE Technologies

(Investment Sector)

Output Block Industry Demand Exogenous Final Demand (amount) for Machinery Mfg, Computer & Electronic Prod Mfg, and Electrical Equip, Appliance mfg sectors Increase

EE Program Budget Spending

(Electricity Sector)

Output Block Industry Demand Exogenous Final Demand (amount) for Professional & Technical Services sector (due to the increased demand of the energy auditing services) and to the Utility sector (due to the enhanced utility administration) Increase

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Table 3. Mapping “Demand-Side Management” Option into CGE Model

TWGs Quantification Results Policy Variable Connection in CGE


Energy Productivity term adjustment in production functions Increase

Energy Savings of Customers


Energy Demand parameter in linear expenditure system Decrease

Electricity Demand Decrease from the Utility Sector

(Electricity Sector) Automatically forthcoming from decrease in direct demand from businesses and households Decrease


Input Demand Increase Energy Customer Outlay on Energy Efficiency (EE) Goods Households

(Residential Sector) Goods Demand Increase


Electricity Tax Increase Paying for the EE Program (Ratepayer Costs) Households

(Residential Sector) Electricity Tax Increase

Investment in EE Technologies

(Investment Sector)

Investment Expenditure (Machinery Manufacturing, Computer & Electronic Manufacturing, and Electrical Equipment & Appliance Manufacturing sectors) Increase

EE Program Budget Spending

(Electricity Sector)

Government Expenditure Professional & Technical Services sector (due to the increased demand of the energy auditing services) and to the Utility sector (due to the enhanced utility administration). Increase

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Evaluative Criteria and Related Considerations

A. Model Performance Criteria

1. Accuracy

2. Scope

3. Detail

4. Transparency

5. Manageability

6. Cost

7. Other132/5/2009 www.climatestrategies.us


B. Model Specifications

1. Geographic area of coverage

2. Time of analysis

3. Macroeconomic Indicators

4. Sectoral Resolution



C. Parameter Values

1. Flexibility

2. Productivity

3. Economic Growth

4. Population Growth

5. Trend Factors

6. Discount Rate



Model Evaluation (Comparison with CGE) A. Model Performance Criteria

1. Accuracy. REMI is capable of a high level of accuracy. It is widely used, indirectly testifying to their abilities on this score. While there are goodness of fit measures for some macroeconometric models, they are not available for individual equations or the entirety of REMI. Still, the inferential statistical approach used to construct REMI is considered the soundest economic modeling approach.A high level of sectoral resolution improves the accuracy of the model. Care in factoring in special features of mitigation options, and future technological and structural changes improves accuracy, as does care in modeling mitigation options and linking them to the appropriate variables.

Of course, there is a tradeoff between cost and accuracy.

2. Scope. REMI is capable of analyzing the entire state economy and the major macroeconomic indicators of interest to this study.

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3. Detail. The REMI model is disaggregated to as fine a level of detail as desired in terms of economic sectors. For example, the utilities sector clearly distinguishes gas and electricity.

4. Transparency. REMI is not a black box. The workings of REMI can be readily explained by using simple economic principles. Individual functional relationships can be extracted for further examination.

5. Manageability. The REMI model is relatively straightforward to use and comes with a user’s guide.

6. Cost. REMI is a modestly priced model.

7. Forecasting ability. REMI is able to generate forecasts for future baselines.

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B. Model Specifications

1. Geographic area of coverage. The REMI model covers the entire state of PA.

2. Time of analysis. The model is capable of analyzing the entire time period of 2009-20.

3. Macroeconomic Indicators. REMI is adept at evaluating impacts on both GSP and employment.

4. Sectoral Resolution. The REMI model contains 169 sectors, which is adequate for the task.



C. Parameter Values

1. Flexibility. The REMI model can be used in a variety of ways and under a variety of critical assumptions.

2. Productivity and Competitiveness. REMI has a formal and comprehensive approach to assessing these.

3. Economic Growth. REMI can do this in its forecasts.

4. Population Growth. REMI can do this in its forecasts.

5. Trend Factors. REMI can do this through the inclusion of exogenous variables.

D. Technology Transfer. REMI is the most widely used state-level macroeconometric model. The company provides excellent training and technical support.

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Overall Assessment

• Based on the analysis of above, the REMI Model is best qualified to be used to analyze the macroeconomic impacts of policies and measures to address climate change in Pennsylvania.

• It is not the superior to all alternatives according to all indicators, but it is for most indicators.

• Part of the advantage stems from the fact that the research team has experience using the REMI Model. Other major advantages stem from it’s econometric foundation, including its forecasting ability.

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Timetable for the Project

• Finalize input data on options – July 15

• Link policy options to REMI variables – Aug 1

• Run preliminary simulations – Aug 14

• Receive feedback on preliminary – Aug 21

• Final runs and draft report – August 31

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macroeconomic impact model overview for pennsylvania

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