Economic Projection with Non-homothetic Preferences: The Performance and Application of a CDE Demand System

In computable general equilibrium modeling, whether the simulation results are consistent to a set of valid own-price and income demand elasticities that are observed empirically remains a key challenge in many modeling exercises. To address this issue, the Constant Difference of Elasticities (CDE) demand system has been adopted by some models since the 1990s. However, perhaps due to complexities of the system, the applications of CDE systems in other models are less common. Furthermore, how well the system can represent the given elasticities is rarely discussed or examined in existing literature. The study aims at bridging these gaps by revisiting calibration details of the system, exploring conditions where the calibrated elasticities of the system can better match a set of valid target elasticities, and presenting strategies to incorporate the system into GTAP8inGAMS—a global computable general equilibrium model written in GAMS and MPSGE modeling languages. It finds that the calibrated elasticities can be matched to the target ones more precisely if the corresponding sectorial expenditure shares are lower, target own-price demand elasticities are lower, and target income demand elasticities are higher. It also verifies that for the GTAP8inGAMS with a CDE system, the model responses can successfully replicate the calibrated elasticities under various price and income shocks.The author gratefully acknowledges the financial support for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial and foundation sponsors and Federal awards, including the U.S. Department of Energy, Office of Science under DEFG02-94ER61937 and the U.S. Environmental Protection Agency under XA83600001-1. For a complete list of sponsors and the U.S. government funding sources, please visit http://globalchange.mit.edu/sponsors/all

Expectations for a New Climate Agreement

With the objective of stimulating timely and open discussion of the current attempt to formulate a new climate agreement—to be reached at the 21st meeting of the Conference of Parties (COP-21) in Paris during November of 2015—analysis is conducted of the expected developments in the lead-up negotiations. Based on the assumption that the architecture of the agreement will likely involve voluntary pledges and ex-post review (akin to the Copenhagen Accord), the domestic policies and measures expected to underlie national negotiating positions are described. Applying a global economic model, the effect of these Nationally Determined Contributions (NDCs) on global greenhouse gas emissions is assessed. The analysis shows that an agreement likely achievable at COP-21 will succeed in a useful bending the curve of global emissions. The likely agreement will not, however, produce global emissions within the window of paths to 2050 that are consistent with frequently proposed climate goals, raising questions about follow-up steps in the development of a climate regime.The Emissions Prediction and Policy Analysis (EPPA) model is supported by a consortium of government, industry and foundation sponsors of the MIT Joint Program on the Science and Policy of Global Change, including U.S. Department of Energy, Office of Science (DE-FG02-94ER61937)

Launching a New Climate Regime

At the 2015 UN Framework Convention on Climate Change (UNFCCC) meeting in Paris, participants in a new international climate agreement will volunteer Nationally Determined Contributions to emissions reductions. To put the planet on a path to declared temperature goals, the growth of global greenhouse gas emissions must cease, and begin to decline, by 2035 to 2040; however, the expected contributions do not yield results consistent with this timeline. Three achievements in Paris and follow-on activities are then crucial components of the new climate regime: a robust system of review with widely accepted measures of national effort; an established, durable plan of future pledge cycles; and increased financial support for the mitigation efforts of less developed countries. The MIT Economic Projection and Policy Analysis (EPPA) model is applied to assess emissions outcomes of expected pledges and national performances in meeting them, and to elaborate the components of a successful launch.The Joint Program on the Science and Policy of Global Change is funded by a consortium of government, industrial, and foundation sponsors (for the complete list see: http://globalchange.mit.edu/sponsors/all). Support from the U.S. Federal Government in the past three years was received from the U.S. Department of Energy, Office of Science under grants DE-FG02-94ER61937, DE-SC0007114, DE-FG02-08ER64597; the U.S. Department of Energy, Oak Ridge National Laboratory under subcontract 4000109855; the U.S. Department of Agriculture under grant 58-6000-2-0099; the U.S. Energy Information Administration under grant DE-EI0001908; the U.S. Environmental Protection Agency under grants XA-83505101-0, XA-83600001-1, and RD-83427901-0; the U.S. Federal Aviation Administration under agreement 09-C-NE-MIT; the U.S. National Aeronautics and Space Administration under grants NNX13AH91A, NNX11AN72G, and subawards 4103-60255 and 4103-30368; the U.S. National Renewable Energy Laboratory under grant UGA-0-41029-15; the U.S. National Science Foundation under grants OCE-1434007, IIS-1028163, EF-1137306, AGS-1216707, ARC-1203526, AGS-1339264, AGS-0944121, and sub-awards UTA08.950 and 1211086Z1; the U.S. Department of Transportation under grant DTRT57-10-C-10015; the U.S. Department of Commerce, National Oceanic and Atmospheric Administration under grant NA13OAR4310084

Transparency in the Paris Agreement

Establishing a credible and effective transparency system will be both crucial and challenging for the climate regime based on the pledge and review process established in the Paris Agreement. The Agreement provides for review of achievements under national pledges (Nationally Determined Contributions, or NDCs), but much of this information will become available only well after key steps in the launch of this latest attempt to control human influence on the climate. Still, in these early years, information and understanding of individual and collective performance, and of relative national burdens under the NDCs, will play an important role in the success or failure of the Agreement. However, because of the phasing of various steps in the 5-year cycles under the Agreement and the unavoidable delays of two or more years to produce and review government reports, the Climate Convention and other intergovernmental institutions are ill-suited to carry out timely analyses of progress. Consequently, in advance of formal procedures, academic and other non-governmental groups are going to provide analyses based on available data and their own methodologies. We explore this transparency challenge, using the MIT Economic Projection and Policy Analysis (EPPA) model, to construct sample analyses, and consider ways that efforts outside official channels can make an effective contribution to the success of the Agreement.We gratefully acknowledge the financial support for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial and foundation sponsors and Federal awards, including the U.S. Department of Energy, Office of Science under DE-FG02-94ER61937 and the U.S. Environmental Protection Agency under XA-83600001-1. For a complete list of sponsors and the U.S. government funding sources, please visit http://globalchange.mit.edu/sponsors/all

Advanced Technologies in Energy-Economy Models for Climate Change Assessment

Considerations regarding the roles of advanced technologies are crucial in energy-economic modeling, as these technologies, while usually not yet commercially viable, could substitute for fossil energy when relevant policies are in place. To improve the representation of the penetration of advanced technologies, we present a formulation that is parameterized based on observations, while capturing elements of rent and real cost increases if high demand suddenly appears due to large policy shock. The formulation is applied to a global economy-wide model to study the roles of low carbon alternatives in the power sector. While other modeling approaches often adopt specific constraints on expansion, our approach is based on the assumption and observation that these constraints are not absolute—the rate at which advanced technologies will expand is endogenous to economic incentives. The policy simulations are designed to illustrate the response under sudden increased demand for the advanced technologies, and are not intended to represent necessarily realistic price paths for greenhouse gas emissions.The authors gratefully acknowledge the financial support for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial sponsors and Federal grants. Suggestions and feedback from participants of the MIT EPPA meeting and Jamie Bartholomay are highly appreciated

Costs of Climate Mitigation Policies

The wide range of cost estimates for stabilizing climate is puzzling to policy makers as well as researchers. Assumptions about technology costs have been studied extensively as one reason for these differences. Here, we focus on how policy timing and the modeling of economy-wide interactions affect costs. We examine these issues by restructuring a general equilibrium model of the global economy, removing elements of the model one by one. We find that delaying the start of a global policy by 20 years triples the needed starting carbon price and increases the macroeconomic cost by nearly 30%. We further find that including realistic details of the economy (e.g. sectoral and electricity technology detail; tax and trade distortions; capital vintaging) more than double net present discounted costs over the century. Inter-model comparisons of stabilization costs find a similar range, but it is not possible to isolate the structural causes behind cost differences. Broader comparisons of stabilization costs face the additional issue that studies of different vintages assume different policy starting dates, often dates that are no longer realistic given the pace of climate change negotiations. This study can aid in interpretation of estimates and give policymakers and researchers an idea of how to adjust costs upwards as the start of policy is delayed. It also illustrates that models that greatly simplify the realities of modern economies likely underestimate costs.We gratefully acknowledge the financial support for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial and foundation sponsors and Federal awards, including the U.S. Department of Energy, Office of Science under DE-FG02-94ER61937 and the U.S. Environmental Protection Agency under XA-83600001-1. For a complete list of sponsors and the U.S. government funding sources, please visit http://globalchange.mit.edu/sponsors/all

The Influence of Gas-to-Liquids and Natural Gas Production Technology Penetration on the Crude Oil-Natural Gas Price Relationship

The paper examines conditions under which gas-to-liquids (GTL) technology penetration shifts the crude oil-natural gas price ratio. Technologies that enable direct substitution across fuels, as GTL does, may constrain the price ratio within certain bounds. We analyze the forecasted evolution of the crude oil-natural gas price ratio over the next several decades under alternative assumptions about the availability and cost of GTL and its natural gas feedstock. We do this using a computable general equilibrium model of the global economy with a focus on the refinery sector in the U.S. Absent GTL, a base case forecast of global economic growth over the next few decades produces dramatic increases in the oil-natural gas price ratio. This is because there is a more limited supply of low-cost crude oil resources than natural gas resources. The availability of GTL at conventional forecasts of cost and efficiency does not materially change the picture because it is too expensive to enhance direct competition between the two as fuels in the transportation sector. GTL only modulates the increasing oil-gas price ratio if both (i) natural gas is much cheaper to produce, and (ii) GTL is less costly and more efficient than conventional forecasts.This work has been funded in part by BP, the MITEI ENI Energy Fellowship, the MITEI Martin Family Fellowship, and sponsors of MIT’s Joint Program on the Science and Policy of Global Change. The Joint Program on the Science and Policy of Global Change is funded by the U.S. Department of Energy, Office of Science under grants DE-FG02-94ER61937, DE-FG02- 08ER64597, DE-FG02-93ER61677, DE-SC0003906, DE-SC0007114, XEU-0-9920-01; the U.S. Department of Energy, Oak Ridge National Laboratory under Subcontract 4000109855; the U.S. Environmental Protection Agency under grants XA-83240101, PI-83412601-0, RD-83427901-0, XA-83505101-0, XA-83600001-1, and subcontract UTA12-000624; the U.S. National Science Foundation under grants AGS-0944121, EFRI-0835414, IIS-1028163, ECCS-1128147, ARC-1203526, EF-1137306, AGS-1216707, and SES-0825915; the U.S. National Aeronautics and Space Administration (NASA) under grants NNX06AC30A, NNX07AI49G, NNX11AN72G and Sub Agreement No. 08-SFWS-209365.MIT; the U.S. Federal Aviation Administration under grants 06-C-NE-MIT, 09-C-NE-MIT, Agmt. No. 4103-30368; the U.S. Department of Transportation under grant DTRT57-10-C-10015; the Electric Power Research Institute under grant EP-P32616/C15124, EP-P8154/C4106; the U.S. Department of Agriculture under grant 58-6000-2-0099, 58-0111-9-001; and a consortium of 35 industrial and foundation sponsors (for the complete list see: http://globalchange.mit.edu/sponsors/all)

The MIT EPPA6 Model: Economic Growth, Energy Use, and Food Consumption

The MIT Economic Projection and Policy Analysis (EPPA) model has been broadly applied on energy and climate policy analyses. In this paper, we provide an updated version of the model based on the most recent global economic database with the base year data of 2007. Also new in this version of the model are non-homothetic preferences, a revised capital vintaging structure, separate accounting of residences, and an improved model structure that smooths its functioning and makes future extensions easier. We compare reference (“business-as-usual”) and policy results for the latest model to the previous version. We also present how projections for the final consumption of food and agricultural products are improved with non-homothetic preferences, and how various assumptions for reference GDP growth, elasticity of substitution between energy and non-energy input, and autonomous energy efficiency improvement may change CO2 emissions and prices.We gratefully acknowledge the financial support for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial sponsors and Federal grants

Impacts of CO2 Mandates for New Cars in the European Union

CO2 emissions mandates for new light-duty passenger vehicles have recently been adopted in the European Union (EU), which require steady reductions to 95 g CO2/km in 2021. Using a computable general equilibrium (CGE) model, we analyze the impact of the mandates on oil demand, CO2 emissions, and economic welfare, and compare the results to an emission trading scenario that achieves identical emissions reductions. We find that the mandates lower oil expenditures by about €6 billion, but at a net added cost of €12 billion in 2020. Emissions from transport are about 50MtCO2 lower with the vehicle emission standards, but with the economy-wide emission trading, lower emissions in transport allow an equal increase in emissions elsewhere in the economy. We estimate that tightening CO2 standards further after 2020 would cost the EU economy an additional €24–63 billion in 2025 compared with achieving the same reductions with an economy-wide emission trading system.The paper benefitted from comments of participants on an earlier draft of the paper presented at a workshop on the EU fuels standards held in Brussels on February 26, 2015, organized by General Motors. The MIT Joint Program on the Science and Policy of Global Change, where the authors are affiliated, is supported by the U.S. Department of Energy, Office of Science under grants DE-FG02-94ER61937, DE-FG02-08ER64597, DE-FG02-93ER61677, DE-SC0003906, DE-SC0007114, XEU-0-9920-01; the U.S. Department of Energy, Oak Ridge National Laboratory under Subcontract 4000109855; the U.S. Environmental Protection Agency under grants XA-83240101, PI-83412601-0, RD-83427901-0, XA-83505101-0, XA-83600001-1, and subcontract UTA12-000624; the U.S. National Science Foundation under grants AGS-0944121, EFRI-0835414, IIS-1028163, ECCS-1128147, ARC-1203526, EF-1137306, AGS-1216707, and SES-0825915; the U.S. National Aeronautics and Space Administration under grants NNX06AC30A, NNX07AI49G, NNX11AN72G and Sub Agreement No. 08-SFWS-209365.MIT; the U.S. Federal Aviation Administration under grants 06-C-NE-MIT, 09-C-NE-MIT, Agmt. No. 4103-30368; the U.S. Department of Transportation under grant DTRT57-10-C-10015; the Electric Power Research Institute under grant EP-P32616/C15124, EP-P8154/C4106; the U.S. Department of Agriculture under grant 58-6000-2-0099, 58-0111-9-001; and a consortium of 35 industrial and foundation sponsors (for the complete list see: http://globalchange.mit.edu/sponsors/all)

Graded Symmetry Algebras of Time-Dependent Evolution Equations and Application to the Modified KP equations

By starting from known graded Lie algebras, including Virasoro algebras, new kinds of time-dependent evolution equations are found possessing graded symmetry algebras. The modified KP equations are taken as an illustrative example: new modified KP equations with $m$ arbitrary time-dependent coefficients are obtained possessing symmetries involving $m$ arbitrary functions of time. A particular graded symmetry algebra for the modified KP equations is derived in this connection homomorphic to the Virasoro algebras.Comment: 19 pages, latex, to appear in J. Nonlinear Math. Phy