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Draft Analytic Blueprint for Materials Provided to the Science Advisory Board Panel on 

the Role of Economy-Wide Modeling in U.S. EPA Regulatory Analysis

This draft analytic blueprint is a companion to draft charge questions developed for a new Science 

Advisory Board (SAB) panel on the technical merits and challenges of using economy-wide models to 

evaluate the social cost, benefit, and economic impacts associated with EPA air regulations. The purpose 

of this document is to briefly describe the types of references and materials that EPA could provide to 

the SAB to help inform the discussion and review of the charge questions. EPA is looking for feedback 

from the public including specific suggestions of potential journal articles or other materials that could 

be developed as an input into the SAB review.

Challenges in the use of economy-wide models to evaluate the social costs of an air regulation 

GENERAL MATERIALS

- “Analyzing Costs” chapter of EPA’s Guidelines for Preparing Economic Analyses (U.S. EPA 2010b):

This chapter defines the concept of social cost, discusses general equilibrium analysis and

measurement issues related to estimating social costs, and summarizes modeling frameworks 

available to estimate social costs – including computable general equilibrium (CGE) models – as well 

as criteria to select the most appropriate approach and potential limitations of these approaches.

MATERIALS RELATED TO THE REPRESENTATION OF REGULATIONS IN ECONOMY-WIDE MODELS

- Table summarizing characteristics used to evaluate the application of different modeling approaches

for the analysis of air regulations: The table will include criteria discussed in U.S. EPA (2010b) - types 

of costs, geographic scope; sectoral scope; expected magnitude; importance of indirect effects - and 

illustrate how the characteristics from a range of air regulations compare to these criteria. For 

example, EPA may include rules that are small in magnitude, impact few sub-sectors, cover multiple

sectors, or are large (e.g. NAAQS), and information on the relative magnitude of costs, timeline for 

implementation, industries affected, types of cost information, etc.

- White paper that documents the process required to represent an air regulation in a CGE model and 

summarizes the results of illustrative CGE model runs: This paper will document the steps involved, 

key assumptions, and challenges that may arise when representing a regulation in a CGE model. It 

may also examine the sensitivity of social cost estimates to the treatment of a subset of issues 

identified in the charge questions (e.g., a small or sector specific rule). EPA intends to use one or 

more CGE models (e.g., EMPAX, IGEM, ADAGE) to complete these illustrative runs. The choice of 

issues evaluated will be based on gaps in the existing literature or EPA analyses.

- Economy–wide modeling results and discussion from regulatory impact analyses for recent EPA air 

rules: EPA has used different CGE models (e.g., EMPAX, ADAGE, IGEM) to evaluate the social costs of
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proposed legislation, some recent air rules, and the retrospective and prospective analyses of the 

Clean Air Act (U.S. EPA 1997, U.S. EPA 1999, U.S. EPA 2011). Examples will be selected to

demonstrate how abatement costs have been represented in CGE models, the types of outputs used 

to characterize social costs (e.g., equivalent valuation, household consumption, GDP, etc.), and 

practical challenges encountered. A table summarizing key assumptions, critical uncertainties, 

known data gaps, challenges, and model evaluation results that illustrate the differences between 

EPA’s compliance cost and benefit models and CGE models will be included for these examples. Key 

differences between CGE models also may be noted.

- Appropriate sections of the peer review reports for the ADAGE and IGEM CGE models: EPA has used 

ADAGE and IGEM for economy-wide analysis of proposed greenhouse gas mitigation legislation and 

EPA regulations. In 2009-2010 EPA undertook a formal peer review of the modeling approach by a 

panel of experts in accordance with the Office of Management and Budget Final Information Quality 

Bulletin for Peer Review (2004) and the U.S. EPA Peer Review Handbook (2006).

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- Summary of issues and findings relevant to estimating the social costs of regulation from the 

literature: For example, Hazilla and Kopp (1990) and Jorgenson and Wilcoxen (1990) provide general 

equilibrium analyses of the impacts of environmental regulations on regulated and non-regulated 

sectors and on the economy as a whole. Hazilla and Kopp discuss and compare partial equilibrium 

and general equilibrium estimates of social costs. Other literature examines the sensitivity of CGE 

results to underlying parameter assumptions (e.g., Alexeeva-Talebi et al. 2012, U.S. EPA 2010a).

- Energy Modeling Forum (EMF) 24 Special Issue of Energy Journal (forthcoming): The EMF brings 

together leading energy and economic modelers and model users with the goal of utilizing the 

collective expertise of participants to conduct model intercomparison exercises and improve 

understanding of important energy and environmental problems. The EMF 24 exercise engaged nine 

top energy-environment-economy models to compare economy-wide market-based approaches 

and sectoral regulatory approaches to potential U.S. climate policy; and to examine the implications 

of assumptions regarding technological improvement and technological availability on modeling 

results. Two overview papers explore, respectively, the cross-model policy and technology 

dimensions of the exercise (Fawcett et al., forthcoming; Clarke et al., forthcoming). Rausch and 

Karplus examine the efficiency and distributional implications of federal regulations in the U.S. 

electric power and transportation sectors by employing a numerical simulation model with a unique 

treatment of regional, technology, and household income heterogeneity; Ross et al. link a CGE 

model (ADAGE) with a detailed linear optimization model of the U.S. electricity sector and examine 

technological and regulatory approaches to reducing emissions. 

 

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The peer review report of ADAGE and IGEM and responses from the developers may be found at: 

http://www.epa.gov/climatechange/Downloads/EPAactivities/Final_peer_review_report_for_IGEM_and_ADAGE.p

df
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MATERIALS ON LINKAGES BETWEEN ENGINEERING/PARTIAL EQUILBRIUM SECTORAL MODELS AND CGE

- White paper on issues that arise when linking sector or engineering models to CGE models: EPA’s 

abatement cost estimates typically come from engineering or partial equilibrium analyses of 

available technologies and are often very detailed (e.g., what technology changes are needed for 

refineries with specific kinds of existing equipment to reduce sulfur in gasoline). This paper will 

describe different methods for linking these types of models to CGE models (e.g., soft versus hard 

linkages) and key issues that may arise based on relevant EPA experience and the published 

literature (e.g., Nestor and Pasurka 1995a, 1995b; Böhringer 1998; McFarland et al. 2004; Sue Wing 

2006; Böhringer and Rutherford 2008; Blanford et al. 2012; and Kiuila and Rutherford 2013).

2 Work 

by Nestor and Pasurka (1995a, 1995b) is particularly relevant as EPA has used data on purchases for 

environmental protection from these articles to allocate incremental capital and operating costs due 

to regulation (often estimated via an engineering or partial equilibrium model) to capital, labor, and 

material inputs represented in a CGE model. 

- White paper outlining how EPA links engineering and/or economic input models such as the 

Integrated Planning Model (IPM) to economy-wide models. Alternative linkages will also be 

presented along with dynamic EMPAX-CGE modeling to illustrate these approaches. Relevant 

sections of the EMPAX peer review (including Appendix B) on linking to other models may also be 

summarized in the white paper.3

MATERIALS ON OTHER GE MODEL FRAMEWORKS TO CONSIDER

- Summary of the literature comparing the applicability of macroeconomic and CGE models for 

regulatory analysis: For example, Repetto and Austin (1997) conducted a meta-analysis and 

concluded that the choice of model type was a significant factor in estimates of mitigation costs.

Smith (2012) also discusses a number of intersections between macroeconomics and environmental 

economics. Of particular interest are the discussion of U.S. EPA (2011) and its incorporation of 

benefits into a CGE model as well as how the state of the economy influences the approach taken to 

evaluate the economic effects of environmental policy.

 

2 Generally speaking there are two methods for linking detailed models to CGE models. “Soft–linking” involves 

solving the models in sequence by drawing outputs from a partial equilibrium model and imposing those results in 

the general equilibrium model. A “hard-linkage” involves incorporating the partial equilibrium model within the 

general equilibrium model and solving them simultaneously.

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The EMPAX peer review and response is available at 

http://www.epa.gov/ttn/ecas/models/empax_peer_review_comments_responses.pdf.
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Challenges in the use of economy-wide models to consider the benefits of an air regulation 

GENERAL MATERIALS

- Paper on how the benefits of regulations could be incorporated into a CGE model: Work by Dale W. 

Jorgenson Associates will discuss conceptual issues in incorporating monetized benefits into a CGE 

model. The paper will estimate benefits and costs of the Clean Air Act Amendments for 1990-2020 

using the IGEM CGE model, which can be compared to U.S. EPA (2011).

- RTI International (2007) memo on incorporating benefits of climate change into a CGE model: While 

the focus of this memo is the incorporation of climate impacts, health benefits are handled similarly 

to U.S. EPA (2011). That is, a number of epidemiological studies are identified and used to estimate 

changes in morbidity and mortality. The morbidity and mortality impacts are translated into changes 

in labor force participation and health care expenditures that are directly included in the ADAGE 

CGE model. A possible extension of the model that is suggested in the white paper is directly 

representing health and/or ecosystem services in the utility function. The paper also discusses an 

approach to incorporating how emissions changes affect household energy demand.

- Relevant sections of the “Analyzing Benefits” chapter of EPA’s Guidelines for Preparing Economic 

Analyses (U.S. EPA 2010b) on methods to monetize health and other types of benefits of regulation.

MODELING MORTALITY AND MORBIDITY EFFECTS IN CGE

- Relevant sections from The Benefits and Costs of the Clean Air Act from 1990 to 2020 (U.S. EPA 

2011) along with a description of the data inputs and procedures used to generate benefits 

estimates and incorporate them into the EMPAX CGE model. U.S. EPA (2011) modeled the 

macroeconomic impacts of air quality related health improvements by focusing on three specific 

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

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

change in medical expenditures associated with pollution-related morbidity. As needed, additional 

information may be provided to describe the BenMAP and PopSim tools and how they were used to 

perform benefits calculations, along with known shortcomings of the methodology.4

- White paper that discusses alternative methods that, compared to those previously used by EPA,

could be used by EPA to include benefits from air regulations in CGE models. This paper will discuss 

such topics as the possible use of state-dependent utility functions, the benefits that may accrue 

due to changes in life expectancy, and non-market benefits. 

 

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BenMAP estimates the human health impacts of air pollution in a given year, while PopSim uses these estimates 

to characterize the change in this risk over a multi-year period. Together, these tools were used in U.S. EPA (2011) 

to estimate the changes in health care expenditures and labor productivity due to the 1990 Clean Air Act 

Amendments that are used as inputs into the CGE model.
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- Summary of the literature on incorporating health benefits into a CGE model: This includes (1) the 

incorporation of health benefits from reduced exposure to flow and stock air pollutants in a CGE 

model (Matus et al. 2008, Selin et al. 2009, Nam et al. 2010, Matus et al. 2012). This line of research 

assesses social benefits of air pollution reductions by including mortality and morbidity effects in 

MIT’s Emissions Prediction and Policy Analysis – Health Effects (EPPA-HE) CGE model and discusses 

how changes in human health influence labor productivity and labor-leisure tradeoffs. Other 

relevant areas of the literature that may be summarized are: (2) how changes in human health may 

influence future preferences for reduced risks (e.g., Murphy and Topel 2006), and (3) how changes 

in human health may affect the shape of the utility function or relative preferences for other goods 

and services (e.g., Viscusi and Evans 1990; Finkelstein et al. 2009).

ADDING NON-MARKET BENEFITS TO CGE

- Papers discussing the incorporation of non-market benefits into CGE models: Carbone and Smith 

(2008, 2013) work toward developing a framework that includes ecosystem and non-use benefits in 

a CGE model. They demonstrate that the incorporation of these benefits can substantially alter 

estimates of changes in welfare from environmental regulations.

- Relevant sections of the “Analyzing Benefits” chapter of EPA’s Guidelines for Preparing Economic 

Analyses (U.S. EPA2010b) on challenges to monetizing non-market benefits (e.g. ecological and 

other non-use benefits) outside of a CGE modeling framework

HOW SPATIAL DIMENSION MATTERS FOR ESTIMATION OF BENEFITS

- Relevant portions of the final Transport Rule analysis to demonstrate that mortality effects from 

particulate matter vary across the country.5This could be supplemented by a description of how the 

analysis was performed and a discussion of the implications for including such benefits in CGE 

models. The spatial scale of CGE models will almost certainly be coarser than the scale of EPA 

benefits analyses, and this may impact how the results of CGE analyses can be interpreted.

- Key articles or summary of the literature on spatial sorting models: Using spatially delineated sorting 

models, Sieg et al. (2004) and Smith et al. (2004) estimate general equilibrium benefits for 

improvements in air quality in the Los Angeles basin. Kuminoff et al. (2013) survey the current state 

of the literature on equilibrium sorting models.

 

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Appendix A (Distribution of the PM2.5-Related Benefits Among Vulnerable and Susceptible Populations) of the 

Regulatory Impact Analysis for the final Transport Rule, p. 331-341. Available at:

http://www.epa.gov/crossstaterule/pdfs/FinalRIA.pdf.
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Challenges in the use economy-wide models to inform economic impacts analysis for an air regulation

GENERAL MATERIALS

- Relevant sections of the “Economic Impact Analysis” chapter of EPA’s Guidelines for Preparing 

Economic Analyses (U.S. EPA 2010b): In particular, this chapter explains the distinction between the 

concepts of social costs and economic impacts. It also discusses impacts on prices and quantities as 

well as plant closures, employment, productivity, and energy market impacts. This chapter also 

discusses the role CGE models may play in estimating economic impacts.

- White paper on economic impacts: This paper will describe the types of economic impacts from air 

regulations that are typically of interest to policymakers and examples of the ways in which CGE 

frameworks have(or have not) been used to evaluate them (e.g., legislative analyses, rules). 

- Relevant sections of Circular A4 (Office of Management and Budget 2003) that provides guidance on

how EPA and other Federal agencies should analyze the distributional impacts of regulation.

- Summary table of EMPAX, ADAGE, IGEM, and several other commonly used CGE models: The table 

will describe characteristics such as sector detail, number of US regions, treatment of and key 

assumptions (e.g., labor supply elasticity) related to labor and capital markets, etc. relevant for the

types of economic impacts from air regulations of interest to policymakers.

CAPITAL AND LABOR MARKETS, SECTORAL DISAGGREGATION, AND ENERGY PRICE IMPACTS

- Summary of relevant literature on the treatment of capital and labor markets in CGE models: For 

instance, McKibbin et al. (2014) use the G-Cubed CGE model to analyze a power-sector-only 

approach to controlling CO2 emissions compared to economy-wide policies. The G-Cubed model 

includes several important rigidities: financial capital is perfectly mobile, but physical capital is 

specific to the sector and region where it was originally installed and is subject to convex adjustment 

costs; and labor is assumed to be perfectly mobile among sectors within regions, but is immobile 

between regions, with inelastic long run labor supply, and slowly adjusting nominal wages in the 

short run. Boeters and Savard (2012) review alternatives for the treatment of labor markets (both 

labor demand and supply) in CGE models. They discuss labor market coordination, including several 

wage-forming mechanisms and inclusion of involuntary unemployment in CGE models.

- Summary of issues related to sectoral disaggregation and impacts of energy prices in CGE models:

For instance, Alexeeva-Talebi et al. (2012) examine sensitivity of predictions from a CGE model to 

different assumptions about sectoral disaggregation - Armington trade elasticities, how technology 

is represented in the production function, and energy shares - and find that results are most 

sensitive to Armington elasticity assumptions. With regard to energy price impacts, Clarke et al. 

(forthcoming) compare the results of nine top energy-environment-economy models. Consistent 

with previous studies, they find that technology assumptions have a large influence on carbon prices 
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and the economy-wide cost of mitigation. Additionally, cost-effectiveness of particular energy 

strategies varies widely across models. U.S. EPA (2010a) offers another example where both sectoral 

and energy price impacts are analyzed in a CGE model.

OTHER MODELING APPROACHES

- Literature on applicability of other economy-wide modeling approaches for evaluating economic 

impacts: For example, Hahn and Hird (1991) discuss and compare the appropriateness of 

macroeconomic and general equilibrium models for examining a wide array of federal economic and 

social regulations. Portney (1981) represents an even earlier examination of the economic impacts

of environmental regulation using macroeconomic forecasting models. 

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

impacts using economy-wide modeling

GENERAL MATERIALS

- Retrospective and Prospective Analyses of the Clean Air Act: Relevant sections of U.S. EPA (1997) 

and U.S. EPA (1999) reports that speak to the degree to which costs and benefits are potentially 

separate or interact. When the benefits and costs from U.S. EPA (1999) were modeled 

independently by Dale W. Jorgenson Associates (2002), the quantified benefits and costs out to the 

year 2100 were $33.9 trillion and $1 trillion, respectively, implying net benefits of $32.9 trillion. 

Modeled together, quantified net benefits were $33.0 trillion. 

ADDRESSING RISK AND UNCERTAINTY IN ECONOMY-WIDE MODELS

- Summary of the literature on the treatment of uncertainty in CGE models: Monte Carlo simulation 

has been used to conduct sensitivity analyses on calibration data and parameters in CGE models 

(e.g. Harrison and Vinod 1992, Elliott et al. 2012). Procedures based on Gaussian quadrature also are

used (e.g. DeVuyst and Preckel 1997). For models with parameters estimated directly from time 

series data, additional procedures are possible (Tuladhar and Wilcoxen 1998, Chapter 9 in Jorgenson 

et al. 2013). Validation exercises are also used (Dixon and Rimmer 2012, U.S. EPA 2010a).

- White paper describing how EPA represents uncertainty in benefits estimates: This paper will 

discuss the use of Monte Carlo simulation and a report (U.S. EPA 2009b) laying out a possible 

approach for identifying key sources of uncertainty and their impacts on results. Key from the 

perspective of integrating benefits into a CGE model is how uncertainty in benefits estimates 

interacts with structural uncertainties within the CGE models (how labor is modeled, the form of the 

utility function, the number of representative consumers, etc.). 
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