# Presentation: 066133

**EMPAX-CGE Model**
- Presented in EPA/OAQPS RIA Workshop
- By Larry Sorrels, OAQPS
- October 18, 2007

## EMPAX-CGE:Presentation Overview

- Background of EMPAX
- Overview of Existing Model
- Description of Industries and Regions
- General Model Structure
- Dynamics
- Types of Model Outputs
- Ongoing Extensions
- Updates
- Additional Industries
- Structure
- State-level Results
- Global Insights forecasts of economic activity

## Background of EMPAX

- Predecessor model (i.e., ICCR EIA model) used for Combustion MACTs (e.g., Industrial Boiler MACT) and SAMI (Southern Appalachian Mountain Initiative) project in late ’90s to 2004 timeframe
- Largely applied a partial equilibrium approach – estimate impacts to a single or few industries or markets at a time
- Determined that multi-sector, energy market focus more appropriate with CGE model
- Previous EMPAX development effort
- National, static version (383 sectors) *– not used*
- Regional, static version (10 regions w/ 39 sectors) *– not used very much*
- Regional, dynamic version (5 regions w/ 17 sectors) – *current version*
- Linked to cost models such as IPM and AirControlNet for CAIR, CAVR, PM NAAQS, and Ozone assessments (dynamic version used in each)
- Note:  still at work in determining if EMPAX will be utilized in ozone RIA due to extrapolated cost concerns – EMPAX is run with known control costs as for previous RIAs
- Underwent external peer-review in 2006, presented to SAB
- Will be used in latest Section 812 report

## EMPAX-CGE:Overview of Current Model

- Dynamic regional economic model of US economy
- 5 Regions
- Aggregation of 10 NERC regions (along state lines)
- 17 Sectors
- 6 energy sectors
- 8 manufacturing sectors
- 3 non-manufacturing sectors
- Baseline conditions characterized by:
- IMPLAN state-level economic data for 2000 (extended to 2005)
- DOE/EIA energy data and forecasts (Annual Energy Outlook – AEO - 2003)
- Intertemporal optimization with perfect foresight
- Except dynamics, use equations from the MIT EPPA model
- Model operates using GAMS software

## EMPAX-CGE:Structure

## EMPAX-CGE:Current Regions

## EMPAX-CGE:Current Regional Detail

**Baseline forecasts of energy production, consumption, and prices from *****Annual Energy Outlook***** (also output by sector and regional GDP growth)**

## EMPAX-CGE:Current Sectoral Detail

- 17 Sectors in each of 5 Regions:
- All sectors are interconnected; sectors are at 2 to 4-digit NAICS level and below (except for crude oil, natural gas, and refined petroleum sectors)
- Model distinguishes between fossil-fired and nonfossil-fired electricity production so costs can be applied separately
- The 7 sectors called “energy-intensive” are defined as such by the Energy Information Administration (EIA)

## EMPAX-CGE:Baseline Data Summary

- Economic and energy data sources:
- IMPLAN state-level economic data (2000)		       (information on 528 industries and 9 household types)
- EIA (AEO, MECS, State Reports, Industry Annuals)
- AEO 2003 energy and industrial output forecasts
- Production and consumption by industry and fuel
- Incorporate baseline energy efficiency improvements
- Natural resources (coal, crude oil, natural gas)
- Match resource prices to AEO forecast (as feasible)
- Set supply elasticity (from MIT/EPPA) around resulting price path

## EMPAX-CGE Energy DetailBaseline Energy Use: Northeast

## EMPAX-CGE:Calibration

- Model uses nested constant elasticity of substitution (CES) equations
- Data show inputs currently used to produce output
- CES functions show options for and ease of substitutions
- Allows changes in inputs and energy-efficiency improvements
- Calibrated to production functions & elasticities     of MIT’s CGE model, EPPA (engineering based)
- Initial model year of 2005 – balanced SAM data
- AEO forecasts (regional GDP, energy production, industrial output & energy consumption, energy prices)

## EMPAX-CGE:Calibration

## EMPAX-CGE: Intertemporal Dynamics

- Arrow-Debreu general equilibrium theory (i.e., perfectly competitive markets, firms are pricetakers) for markets that are covered in EMPAX
- Intertemporally optimizing with foresight
- Households maximize present value (PV) of future consumption subject to budget (and time) constraints
- Firms maximize PV of future profits 	                                 subject to technology constraints
- Initial year of 2005, usually solves to 2050
- Time periods at 5-year intervals connected by savings-investment decisions of households

## EMPAX-CGE: Intertemporal Dynamics

- Sources of Growth:
- Technology change
- Baseline includes technological progress & energy efficiency improvements from AEO forecasts
- Increases in energy prices encourage industrial efficiency and substitution to K/L as well as household substitution to out of energy goods
- Increases in natural resources (stocks are modeled)
- Capital accumulation
- Labor supply and productivity (regional GDP forecasts)
- Includes capital installation costs that determine adjustment dynamics over time
- Capital stock levels do not adjust instantly or costlessly
- Quadratic costs control how fast economy responds	                                  (Goulder, McKibbin/Wilcoxen)

## EMPAX-CGE:Changes in Technology

- Baseline energy efficiency improvements from AEO energy consumption forecasts
- Model structure allows technology improvements (not a fixed coefficient input-output approach)
- Model structure captures effects from changes in energy prices
- Encouragment of industry fuel efficiency through use of additional capital/labor in place of fuel
- Substitution out of energy goods by households due to increase in energy prices
- All interactions between energy and economy are considered (e.g., lower energy consumption, use of additional capital in manufacturing, extra purchasing power of households)

## EMPAX-CGE:Tax Interactions

- Includes distortions from taxes:
- Labor (FICA) and sales/excise taxes – IMPLAN data
- Personal income taxes – based on NBER TAXSIM data
- Capital – user cost of capital formulation (e.g., Fullerton)
- Labor supply elasticities control willingness of households to switch between labor and leisure
- Compensated elas of 0.4, uncompensated elas of 0.15 (based on Goulder, Williams, Fullerton, others)
- Estimates of baseline tax distortions in model:
- MCPF – marginal cost of public funds (~1.22)
- MEB – marginal excess burden (~0.31)

## EMPAX-CGE:Households

- Need to examine how spillover effects of policies will affect labor and capital markets, thus altering purchasing power of households
- IMPLAN data define consumption patterns and income sources for 9 groups based on:
- US BLS - *Consumer Expenditure Survey*
- US Census Bureau - *Decennial Census & Population Survey *

## EMPAX-CGE:Households

- To capture important effects, several households are specified in each region based on income
- Different groups are run simultaneously in model so that interactions between households’ decisions and policies are determined endogenously by the model
- Typically aggregate households into
- 	4 types in each of 5 regions = 20 households
- $0 to $14,999
- $15,000 to $29,999
- $30,000 to $49,999
- $50,000 and above

## EMPAX-CGE:Environmental Expenditures

- Environmental expenditures (e.g., compliance cost estimates from IPM and/or AirControlNet) must be allocated to purchases of inputs from other industries within CGE model
- In absence of other data, Nestor and Pasurka (1995) information on environmental protection expenditures forms basis of this allocation
- Allows model to capture ripple effect to other sectors associated with environmental expenditures by linking them to purchases of their goods and services (and factors of production)

## EMPAX-CGE:Outputs

- General: GDP, welfare (EV), trade, investment
- Production
- Output by sector ($ and %)
- Labor use by sector ($ and %)
- Capital earnings by sector ($ and %)
- Households
- Consumption of goods ($ and %)
- Labor supply decisions
- Energy
- Production by type ($ and BTU and %)
- Industrial consumption by fuel ($ and BTU and %)
- Household consumption by fuel ($ and BTU or kWh and %)
- Heatrates in electricity generation (BTU per kWh)

## EMPAX-CGE:External Peer Review

- Dr. Charles Ballard, Economics Professor, Michigan State University
- In many ways, the model described there is an impressive piece of work... generally speaking, I believe that this model is capable of providing insights into the effects of environmental policy changes.
- Dr. Christoph Bohringer, Professor, Center for European Economic Research
- Overall, the model documentation conveys the impression of solid competent work.
- Dr. Hillard Huntington, Stanford Energy Modeling Forum
- The model will be very useful for deriving regional and sectoral impacts of environmental policies that use economic instruments that directly affect the costs of using different energy types.
- Suggestions for Improvement:
- Provide results from analyses – at the time, there were no publicly available findings.
- Conduct sensitivity analyses to illustrate model reactions.
- Consider adjusting some of the elasticity parameters
- Add additional descriptions of policy evaluation techniques.

## EMPAX-CGE Output (CAIR: Energy Intensive Production - US)

## EMPAX-CGE Output (CAIR: Production Changes - US)

## EMPAX-CGE Output (CAIR: Regional Production Changes)

## EMPAX-CGE:Extensions to Model

- General Updates
- Use 2004 state economic data that RTI got from IMPLAN
- current version uses 2000 IMPLAN data
- Newer AEO forecasts (2006 or 2007)
- current version uses AEO 2003
- Additional Industries
- Increase the number of industries from current 17 to perhaps 25-30, depending on model willingness (tradeoff between industry coverage v. computing efficiency) – many nonlinear equations in dynamic EMPAX version makes convengence concerns important

## Possible Additional Industries for Inclusion in EMPAX-CGE

- Mining – NAICS 21 (mining other than coal)
- Construction – NAICS 23
- Services
- Wholesale & Retail Trade (NAICS 42, 44-45)
- Transportation Services (NAICS 48)
-  Information (NAICS 51)
-  Business/Professional (NAICS 52-56)
-  Education (NAICS 61)
-  Health Care (NAICS 62)
-  Other Services (NAICS 71, 72, 81)
-  Public Services (NAICS 92)

## EMPAX-CGE:Extensions to Model

- Developing a state-level version of EMPAX; to do so,
- Run a regional model of the U.S.
- 	(use current 5 regions)
- Pass relevant results to individual state model (under development)
- State-level version of EMPAX then uses regional/U.S. impacts to estimate state-specific effects of a policy – useful for driving emission projection models (e.g. EGAS)
- Difficulties:
- Getting model baselines to solve is significant effort
- 	(especially with more industries and regions)
- How to make the model framework flexible:
- save new policy results into model baselines
- possible shifts in industries or time frame?

## EMPAX-CGE:Extensions to Model

- Global Insights forecasts of economic activity
- Annual forecasts for around 25 years into future                     to help guide the baseline solution in EMPAX
- Most important forecasts are for:
- Real state GSP by NAICS (generally 2-digit)
- Industrial production indices for manufacturing (3-digit NAICS)
- Other possible data includes things like number of households, employment, income, etc.
- Use EMPAX baseline to provide information to EGAS model (for emissions growth) on things like industrial output and earnings, income, consumption, fuel use
- EMPAX should be updated to include changes listed above in first half of 2008

## Need more information?

- Model documentation is on the Internet at _[http://](http://www.epa.gov/ttn/ecas/EMPAXCGE.htm)__[www.epa.gov/ttn/ecas/EMPAXCGE.htm](http://www.epa.gov/ttn/ecas/EMPAXCGE.htm)_In addition, responses to peer review questions are also found at this web site
- Or, contact Larry Sorrels (_[sorrels.larry@epa.gov](mailto:sorrels.larry@epa.gov)_) or Tom Walton (_[walton.tom@epa.gov](mailto:walton.tom@epa.gov)_) for more information