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Draft Charge Questions for Science Advisory Board Panel on the Role of Economy-Wide 

Modeling in U.S. EPA Analysis of Air Regulations

In accordance with Executive Orders 12866 and 13563, EPA evaluates the benefits, costs, and economic 

impacts of major air regulations to inform the policy process and the public of their likely economic 

effects. While cognizant of limited resources and data, EPA strives to rely on the best available science 

when estimating these economic effects using both benefit-cost analysis and economic impact analysis. 

Air regulations considered by EPA vary widely with respect to the types of pollution addressed, sectoral 

and geographic scope, regulatory design, stringency, types of benefits and costs, and across other 

dimensions. EPA considers these characteristics when gauging which analytic tools can be applied in a 

practical and analytically defensible way to estimate costs, benefits, and economic impacts within a 

particular regulatory context. 

For nearly all benefit-cost analyses conducted by EPA in support of air regulations, the costs are 

estimated using engineering or detailed partial equilibrium sector models which are compared to 

benefits that are likewise estimated through partial equilibrium models. EPA has evaluated, and will 

continue to evaluate, the appropriate role for economy-wide modeling in informing the regulatory 

process. While the Advisory Council on Clean Air Compliance Analysis review of the Second Prospective 

Study of the Clean Air Act Amendments stated that inclusion of benefits in the economy-wide model

that was specifically adapted for use in that study “represent[ed] a significant step forward in benefitcost analysis,” EPA recognizes that serious technical challenges remain when attempting to evaluate the 

benefits and costs of potential regulatory actions using economy-wide models.1

Policy makers and the public also have a keen interest in the distribution of social costs and benefits 

across households and sectors (i.e., economic impacts) through mechanisms such as energy prices or 

labor market impacts. In response, some external entities have conducted analyses employing economywide models to estimate how the costs of regulation are distributed, but these exercises have not 

incorporated benefits. The accuracy and defensibility of such analyses is also highly dependent on the 

quality of the assumptions and data used to represent regulations in the model, and on the inherent 

strengths and weaknesses of the particular model employed. 

Therefore, we ask the Panel to examine the technical merits, technical challenges, and potential value 

added, relative to other modeling approaches, of using economy-wide models in a regulatory setting; to 

advise the Administrator of the results of this examination so that future EPA decisions on the use of 

economy-wide models can be more fully informed; and to identify potential paths forward for 

improvements in economy-wide models that could address their existing limitations and increase their 

potential utility as analytic tools to support regulatory decisions.

 

1

EPA Advisory Council on Clean Air Compliance Analysis (2010). Review of the Final Integrated Report for the 

Second Section 812 Prospective Study of the Benefits and Costs of the Clean Air Act, EPA-COUNCIL-11-001.
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Challenges in the use of economy-wide models to evaluate the social costs of an air 

regulation 

When examining the value of a proposed government policy, the social costs can be compared with the 

social benefits in a benefit-cost analysis, or compared with the social costs of alternative policies that 

achieve similar goals in a cost effectiveness analysis. Computable general equilibrium (CGE) models 

provide one potential tool for estimation of the social costs of a policy. 

1. EPA has extensive experience using a wide range of economic models to evaluate air regulations.

These models are generally tailored to the scope and timeframe of the regulations, ranging from 

static partial equilibrium models that estimate costs in a single product market in a single year, to 

dynamic CGE models that estimate costs for multiple markets over time. Given this context, what 

are the advantages and drawbacks of a CGE approach (versus an engineering or partial equilibrium 

approach) for estimating social costs, including the differences in social costs between alternative 

regulatory options? 

2. Model choice and the appropriateness of using an economy-wide approach to evaluate the 

economic effects of policy are dependent on many factors. For example, a CGE model may be more 

appropriate for use in the analysis of a regulation that is implemented over several years and that 

constitutes a large-scale intervention in the economy, requiring relatively large compliance 

expenditures that impact multiple sectors, either directly or indirectly. How does each factor listed 

below affect the technical merits of using an economy-wide model for estimating social costs?

Please consider the relative importance of these factors separately.

o Relative magnitude of the abatement costs of the rule.

o Time horizon for implementation of the rule.

o Number and types of sector(s) directly and/or indirectly affected by the regulation, and the 

magnitude of these potential market effects.

o Level of detail needed to accurately represent the costs of the rule (e.g., Is it credible to 

assume more aggregate model parameters used in CGE are valid for a subset of the 

industry? When is it important to include a detailed representation of a particular sector, 

such as the power sector? When is it important to include transition costs?).

o Appropriate degree of foresight (e.g., When is it appropriate to use a recursive dynamic 

model or an intertemporally optimizing model? If only one type is available, to what degree 

can alternative foresight assumptions be approximated?).

o How a model is closed, particularly how international trade is represented (e.g. When is a 

detailed representation of the rest of the world important for estimates of social costs?).

o Considerations relevant to the availability and cost of an economy-wide model versus 

alternative modeling approaches (i.e., to inform analytic choices that weigh the value of 

information obtained against analytic expenditures when resources are constrained).

o Ability to incorporate and appropriately characterize uncertainty in key parameters and 

inputs (e.g., engineering costs).
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3. Are other factors beyond those listed above relevant to consider when assessing whether and how 

to model the social costs of a regulatory action in an economy-wide framework?

4. Most EPA regulations do not operate through price; instead they are typically emission-rate and/or 

technology-based standards. What are the particular challenges to representing regulations that are 

not directly implemented through price in an economy-wide framework? Under what circumstances 

is it particularly challenging to accurately represent such regulations in these models?

5. EPA has previously used CGE models to estimate the social costs of regulation by calculating 

equivalent variation (EV) but has also reported changes in other aggregate measures such as GDP 

and household consumption. Setting aside benefits for the moment, what are the appropriate 

metrics to measure social costs? What are the advantages or drawbacks of using an EV measure vs. 

GDP or household consumption to approximate a change in welfare?

6. EPA recognizes that, in some circumstances, the use of multiple models may be advantageous when 

characterizing the costs of regulation. For instance, a partial equilibrium model can provide needed 

sector detail while a CGE model accounts for pre-existing market distortions and how compliance 

costs in one sector affect other sectors of the economy. What conceptual and technical issues are 

important to consider when assessing the potential linking of detailed sector cost models or bottomup engineering estimates of abatement costs with a general equilibrium framework? 

7. When EPA has estimated the economic effects of regulations on multiple markets it has relied 

primarily on CGE models, such as the EPA-developed EMPAX and the Jorgenson-developed IGEM 

models. Are there other economy-wide modeling approaches beside CGE that EPA should consider 

for estimating the social costs of air regulations (e.g., input-output models, econometric macro 

models, dynamic stochastic general equilibrium models)? What are the potential strengths and 

weaknesses of these alternative approaches in the environmental regulatory context? 

Challenges in the use of economy-wide models to consider the benefits of an air regulation 

The Second Prospective Analysis of the Clean Air Act Amendments (also known as the Section 812 study) 

modeled the macroeconomic impacts of air quality-related health improvements by focusing on three 

specific effects: (1) the change in household time endowment from pollution-related mortality impacts, 

(2) the change in household time endowment from pollution-related morbidity, and (3) the change in 

medical expenditures associated with pollution-related morbidity.2This is admittedly an incomplete list 

of potential benefits, and EPA seeks guidance as to the incorporation of benefits estimates into 

economy-wide modeling frameworks. 

 

2

U.S. EPA (2011). The Benefits and Costs of the Clean Air Act from 1990 to 2020. 

http://www.epa.gov/air/sect812/feb11/fullreport_rev_a.pdf.
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1. Setting aside costs for the moment, what are the main conceptual and technical hurdles to 

representing the benefits of an air regulation in a general equilibrium framework (e.g. data 

requirements, developing detailed subsections of the model such as more realistic labor markets, 

scale and scope)? What would be required to overcome them?

2. For the Section 812 study, EPA modeled mortality and morbidity impacts (e.g., the benefits from 

reduced premature mortality due to reduced PM2.5 exposure) in a CGE framework as a change in

the household time endowment. Is it appropriate to continue modeling the mortality and morbidity 

impacts as a change in the time endowment? If not, what other approaches warrant consideration?

3. Approximately 95 percent of monetized benefits of air regulations arise from willingness to pay for 

reductions in the risk of premature mortality, which is not equivalent to the value of the change in 

the household time endowment. Is there sufficient empirical research to support the incorporation 

of other representations of mortality and morbidity impacts or additional benefit categories? What 

approaches could be used to incorporate these additional benefits?

4. When individuals experience changes in medical expenditures, this changes the budget available to 

the consumer for other goods and services. However, the consumer could also experience changes 

in their relative preferences for these goods and services (e.g., outdoor activities) as a result of a 

change in their health and/or life expectancy. Is this a change that could be captured in a CGE 

model? Under what circumstances would the expected impact be too small to be of importance to 

the quantitative results? If this effect cannot be modeled, how can the approach to incorporating

the change in medical expenditures, as employed in the Section 812 study, be improved upon?

5. Some potential benefits, such as productivity gains of the workforce due to cleaner air, are not 

typically quantified. Is there a sufficient body of empirical research to support development of a 

technique for incorporating productivity gains and other benefits that have not been typically 

quantified into a CGE framework? If so, are there particular approaches that EPA should consider?

6. Impacts on non-market resources are not typically incorporated into CGE frameworks, though 

research by Carbone and Smith (2008, 2013)

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has indicated that these impacts could be important in 

this context. Is there a sufficient body of empirical research to support the development of 

techniques for incorporating these impacts into existing CGE models that may be available to EPA?

What are the particular challenges to incorporating non-use benefits into a general equilibrium 

framework (e.g. non-separability)?

 

3

Carbone, J.C. and V. K. Smith (2008). "Evaluating Policy Interventions with General Equilibrium Externalities." 

Journal of Public Economics, 92 (5-6); Carbone, J.C. and V. K. Smith (2013). "Valuing Ecosystem Services in General 

Equilibrium." Journal of Environmental Economics and Management, 66(1), 72–89. 
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7. What insights does a CGE model provide when the benefits cannot be completely modeled? How 

should the results be interpreted when only some types of benefits can be represented in a CGE 

modeling framework? 

8. EPA’s benefits modeling commonly takes into account the spatial distribution of environmental 

impacts to quantify the impacts on spatially distributed human populations. How would one 

capture the spatial component of health or other benefits in an economy-wide framework?

Challenges in the use economy-wide models to inform economic impacts analysis for an air 

regulation

EPA has available to it a range of methods and tools already in use to evaluate the way in which positive 

and negative economic impacts associated with an air regulation are distributed (e.g., across sectors, 

households, and time) in accordance with a variety of Executive Orders (i.e., 12866, 13563, and others). 

1. CGE models often assume forward-looking rational agents and instantaneous adjustment of markets 

to a new, long run equilibrium (for instance, most assume full employment). A 2010 peer review of 

the ADAGE and IGEM models indicated that this is “probably a reasonable assumption as these 

models should be viewed as modeling scenarios out forty or more years for which economic 

fluctuations should be viewed as deviations around a full-employment trend.” In this context and 

relative to other tools EPA has at its disposal, to what extent are CGE models technically appropriate 

for shedding light on the economic impacts of an air regulation, aside from its welfare or efficiency 

implications? In particular, please consider the following types of economic impacts:

o Short and long run implications of energy prices for households and firms.

o Sectoral impacts (including price and quantity changes, plant openings and closures).

o Transition costs in capital or labor markets (e.g. representation of rigidities in the labor and 

capital markets).

o Equilibrium impacts on labor supply or demand.

2. External organizations have also used CGE models to assess the economic impact of recent EPA 

regulations. These studies vary in quality: methods are often not based on first-principles of 

economics and significant differences in assumptions can meaningfully affect the results. These 

studies also have not incorporated benefits. What criteria should be used to evaluate the 

scientifically defensibility of CGE models to evaluate economic impacts? What are the advantages 

and challenges or drawbacks of using a CGE or other economy-wide modeling approach (versus a 

more detailed partial equilibrium approach) to evaluate these types of economic impacts? 

3. Are there other economy-wide modeling approaches that EPA could consider in conjunction with 

CGE models to evaluate the short run implications of an air regulation (e.g., macro-economic,

disequilibrium, input/output models)? What are the advantages or disadvantages of these 

approaches? 
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Considerations for generating directly comparable estimates of social costs, benefits, and 

economic impacts using economy-wide modeling

The benefit-cost framework as employed in EPA analyses compares the monetized health and welfare 

benefits of a regulation with the social costs of the compliance measures necessary to meet the 

standard. In light of the detailed discussions you have had – pursuant to the preceding charge questions 

– on representing social costs, benefits, and economic impacts in an economy-wide framework, please 

answer the following questions.

1. Compared to other modeling tools at EPA’s disposal, what are the technical merits and challenges of 

using economy-wide models to evaluate the social costs, benefits, and/or economic impacts of

relevant air regulations? What criteria could be used to choose between different economy-wide 

models/frameworks? What features are particularly desirable?

2. Are there potential interactions between the cost and benefit sides of the ledger (e.g. because of 

channels through which benefits operate) that make it difficult to make defensible comparisons 

between costs and benefits when: 

o Social costs are estimated using a CGE framework but benefits are estimated using a partial 

equilibrium framework.

o Some of the benefits are not captured in the CGE framework include long-lived benefits (e.g. 

climate benefits).

What is the potential for mis-estimation of the costs or benefits in these cases (either under or 

double-counting)?

3. When benefits are included in a CGE model, it is possible for economic welfare measures for the 

economy as a whole to be positive even when there is a negative impact on GDP (for instance, in the 

Section 812 study).4Relying on net measures obscures the costs and benefits of the policy that are 

typically reported separately in a regulatory analysis as well as how costs and benefits are felt 

throughout the economy (e.g., benefits and costs are often distributed differently). In the case 

where EPA does not have a tool that defensibly incorporates benefits into an economy-wide 

framework, there is also the risk that policymakers and the public may mistakenly interpret the 

results as net measures when they only represent the cost side of the ledger. What are the 

potential drawbacks of using economy-wide models to present information on costs where there is 

not a corresponding capability to estimate benefits? If the SAB advises that the use of economywide models may be appropriate in certain circumstances, are there particularly useful ways in 

which results from a CGE model could be presented to the public and policy makers? 

 

4

See Exhibits 13 and 14 of the 812 study at http://www.epa.gov/oar/sect812/feb11/graphicsstack.pdf.
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o Given the many assumptions and uncertainties inherent in modeling the impacts of a 

regulation in a CGE or other type of economy-wide framework, are absolute measures of 

welfare, social costs, and benefits more scientifically defensible or should the focus be on 

relative comparisons across proposed regulatory alternatives? (Should we have greater 

confidence in the estimated welfare change between baseline and policy scenario or in the 

relative difference in welfare across policy scenarios?)

o What are the technical limitations to presenting both general equilibrium and partial 

equilibrium measures when assessing the net benefits of a regulation?

4. The National Academy of Sciences (2013) identifies three type of uncertainty: statistical variability 

and heterogeneity (or exogenous uncertainty); model and parameter uncertainty, and deep 

uncertainty.5 How can these types of uncertainty be addressed in an economy-wide modeling 

framework? How can EPA be reasonably confident that it is producing credible welfare or economic 

impact estimates? 

o How can uncertainty be characterized when reporting the results from an economy-wide 

model? 

o Are sensitivity analyses of important model parameters and/or model assumptions a 

reasonable way to assess uncertainties involved in this type of economic modeling? Are 

there circumstances in which the use of multiple economy-wide models should be 

considered?

o Are the models precise enough to accurately represent the general equilibrium welfare 

effects of a regulation that has relatively small engineering costs or monetized benefits?

What about for evaluating economic impacts? If yes, under what circumstances?

5. Bearing in mind current and future resource limitations, what should EPA prioritize as its longer 

term research goals with respect to improving the capabilities of economy-wide models to evaluate 

social costs, benefits, and/or economic impacts?

 

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National Research Council (2013). Environmental Decisions in the Face of Uncertainty. Washington, DC: The 

National Academies Press. Available at http://www.nap.edu/catalog.php?record_id=12568.