MACROECONOMIC IMPACT MODEL
OVERVIEW FOR PENNSYLVANIA
by
Adam Rose
University of Southern California
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
2/5/2009
www.climatestrategies.us
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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
4
Figure B1. REMI Model Linkages (Excluding Economic Geography Linkages)
5
Figure B2. Econ omic Geogr aphy Li nkages
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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 results
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Table 1. GHG Mitigation Options of California in 2020
Sector
AFW
AFW
AFW
ES
ES
ES
ES
ES
ES
ES
ES
ES
ES
ES
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
Landfill Methane Control (Discrete Early
Action)
Sustainable Forest Target
Methane Capture at Large Dairies
1
5
1
$1.00
$10.00
$156.00
0.17%
0.84%
0.17%
0.17%
1.01%
1.17%
15.2
-$205.00
2.55%
2.55%
6.9
1
3.8
-$190.00
-$146.00
-$145.53
1.16%
0.17%
0.64%
3.71%
3.87%
4.51%
3
-$56.67
0.50%
5.01%
1.5
-$10.00
0.25%
5.26%
2.1
$0.00
0.35%
5.62%
21.2
8
$73.40
$106.25
3.55%
1.34%
9.17%
10.51%
1
1.3
$292.00
$776.15
0.17%
10.68%
0.22%
10.90%
Energy Efficiency--Electricity
Increase Combined Heat and Power Use
by 32,000 GWh (Net reduction includes
avoided transmission loss benefits)
Additional Natural Gas Energy Efficiency
Additional Electricity Energy Efficiency
Oil and Gas Extraction GHG Emission
Reduction
GHG Leak Reduction from Oil and Gas
Transmission
California Solar Program (including New
Solar Homes Partnership
Renewable Portfolio Standard (33% by
2020)
Coal Emission Reduction Standard
Expanded Solar Water Heating: 1.75
million units installed by 2020
Expanded Million Solar Roofs: 5,000
MW by 2020
Cumulative
GHG
Reduction
Potential
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RCI
RCI
RCI
RCI
RCI
RCI
RCI
RCI
RCI
RCI
Industrial Boiler Efficiency
Refinery Energy Efficiency Process
Imp rovement
Stationary Internal Combustion Engin e
Electrification
Residential Refrigeration Early
Retirement Program
Energy Efficiency--Natural Gas
1.5
-$84.67
0.25%
0.25%
5
-$76.60
0.84%
1.09%
0.2
-$65.00
0.03%
1.12%
0.1
4.2
-$60.00
-$52.38
0.02%
0.70%
1.14%
1.84%
Waste Reduction in Concrete Use
High GWP Recycling and Dep osit
Program
Carbon Intensity Standard for Cement
M anufacturers
1
-$28.00
0.17%
2.01%
6.3
-$10.48
1.06%
3.07%
2.5
-$1.20
0.42%
3.49%
0.1
-$1.00
0.02%
3.50%
3.5
$0.00
0.59%
4.09%
SF6 Leak Reduction and Recycling in
Electrical Ap p lications
Carbon Intensity Standard for Concrete
Batch Plants
4
$0.15
0.67%
4.76%
RCI
Sp ecifications for Commercial and
Industrial Refrigeration
SF6 Limi ts in Non-Utility and NonSemiconductor Ap plications (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%
0.15
$20.00
0.03%
4.89%
0.1
$20.00
0.02%
4.90%
0.2
1
$30.00
$100.00
0.03%
0.17%
4.94%
5.11%
RCI
RCI
RCI
High GWP Reduction in Semiconductor
M anufacturing (Discrete Early Action)
Alternative Supp ressants in Fire
Protection Sy stems
Glass Manufacturing Efficiency
Foam Recovery and Destruction Program
RCI
Removal of Methane Exem ption from
Existing Refinery Regul ations
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%
RCI
RCI
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TLU
TLU
TLU
Tire Pressure Program
Tire Tread Standard
Goods M ovement Efficiency Measures
0.82
0.3
3.5
-$767.07
-$410.00
-$354.29
0.14%
0.05%
0.59%
0.14%
0.19%
0.77%
TLU
Heavy-Duty Engine Efficiency
0.6
-$311.67
0.10%
0.88%
2
-$310.50
0.34%
1.21%
4
-$253.75
0.67%
1.88%
31.7
-$174.24
5.32%
7.20%
0.5
1
1
-$170.00
-$155.25
-$155.25
0.08%
0.17%
0.17%
7.28%
7.45%
7.62%
1
1
-$155.25
-$155.25
0.17%
0.17%
7.78%
7.95%
2.8
-$155.00
0.47%
8.42%
0.89
-$5.62
0.15%
8.57%
0.1
$0.00
0.02%
8.59%
1
$0.00
0.17%
8.75%
16.5
$0.00
2.77%
11.52%
0.2
$0.00
0.03%
11.55%
0.5
$4.80
0.08%
11.64%
2.5
$6.40
0.42%
12.06%
1.4
$457.14
0.23%
12.29%
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
TLU
Regiona l Performance-Based VMT
Targets and Local Government Action
Feebates for ligh t duty vehicles (in
addition to Pavley )
Pavley I and II – Light -Duty Vehicle
GHG Standards
M edium- and Heavy-Duty Vehicle
Hy bridization
Congestion Pricing
Pay-as-y ou-drive
Indirect Source Rules for New
Develop ment
Programs to reduce vehicle trip s
Low Friction Engin e Oils
Solar-Reflective Automotive Paint and
Window Glazing
Enforcement of Federal Ban on
Refrigerant Release during Servicing or
Dismantling of M otor Vehicle Air
Conditioning Sy stems
High Sp eed Rail
Low Carbon Fuel Standard (Discrete
Early Action)
Ship Electrification at Ports (Discrete
Early Action)
M otor Vehicle Air Conditioning Sy stems:
Reduction of Refrigerant Emissions from
Non-Professional Servicing (Discrete
Early Action)
Low GWP Refrigerants for New M otor
Vehicle Air Conditioning Sy stems
Heavy-Duty Vehicle GHG Emission
Reduction (Aerody namic Efficiency )—
(Discrete Early Action)
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Table 2. Mapping “Demand-Side Management” Option into REMI Inputs
TWGs Quantification Results
Energy Savings of
Customers
Electricity Demand
Decrease from the
Utility Sector
Energy Customer
Outlay on Energy
Efficiency (EE)
Goods
Paying for the EE
Program (Ratepayer
Costs)
Investment in EE
Technologies
EE Program Budget
Spending
Businesses
(Commercial and
Industrial Sectors)
Households
(Residential Sector)
Policy Variable Linkage in REMI
Wages, Prices, and Costs BlockFuel
CostsElectricity Fuel Cost for Individual Industry
(amount)Decrease
Wages, Prices, and Costs BlockPrices (housing and
consumer)Consumer Price (equivalent currency
amount)Household OperationDecrease
Electricity Sector)
Output BlockIndustry DemandExogenous Final
Demand (amount) for Utilities sectorDecrease
Businesses
(Commercial and
Industrial Sectors)
Wages, Prices, and Costs BlockProduction Cost
(amount) for the all the REMI sectorsIncrease
Households
(Residential Sector)
Businesses
(Commercial and
Industrial Sectors)
Households
(Residential Sector)
Output BlockConsumer Spending (amount)
Computers and AppliancesIncrease
Output BlockConsumption Reallocation
(amount)All Consumption Sectors Decrease
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 Sector)
Output BlockIndustry DemandExogenous Final
Demand (amount) for Machinery Mfg, Computer &
Electronic Prod Mfg, and Electrical Equip, Appliance
mfg sectorsIncrease
(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
Energy Savings of
Customers
Electricity Demand
Decrease from the
Utility Sector
Energy Customer
Outlay on Energy
Efficiency (EE)
Goods
Paying for the EE
Program (Ratepayer
Costs)
Investment in EE
Technologies
EE Program Budget
Spending
Businesses
(Commercial and
Industrial Sectors)
Households
(Residential Sector)
(Electricity Sector)
Businesses
(Commercial and
Industrial Sectors)
Households
(Residential Sector)
Businesses
(Commercial and
Industrial Sectors)
Households
(Residential Sector)
Policy Variable Connection in CGE
Energy Productivity term adjustment in production
functionsIncrease
Energy Demand parameter in linear expenditure
systemDecrease
Automatically forthcoming from decrease in direct
demand from businesses and householdsDecrease
Input DemandIncrease
Goods DemandIncrease
Electricity TaxIncrease
Electricity TaxIncrease
(Investment Sector)
Investment Expenditure (Machinery Manufacturing,
Computer & Electronic Manufacturing, and Electrical
Equipment & Appliance Manufacturing sectors)
Increase
(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.
3.
4.
5.
6.
7.
2/5/2009
Scope
Detail
Transparency
Manageability
Cost
Other
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B. Model Specifications
1. Geographic area of coverage
2. Time of analysis
3. Macroeconomic Indicators
4. Sectoral Resolution
2/5/2009
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C. Parameter Values
1. Flexibility
2.
3.
4.
5.
6.
2/5/2009
Productivity
Economic Growth
Population Growth
Trend Factors
Discount Rate
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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.
2/5/2009
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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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