The synthesis of bottom-up and top-down approaches to climate policy modeling : Electric power technologies and the cost of limiting US CO2 emissions

TLDR: In this paper, the authors incorporate technology detail into the electricity sector of a computable general equilibrium model of the US economy to characterize electric power's technological margins of adjustment to carbon taxes and to elucidate their general equilibrium effects.

About: This article is published in Energy Policy.The article was published on 2006-12-01 and is currently open access. It has received 123 citations till now. The article focuses on the topics: Computable general equilibrium & Electric power.

Figures

Fig. 4. Electric power sector detail in the hybrid model SAM (2000 dollars 1010). Source: Sue Wing (forthcoming).

Fig. 8. The impact of carbon taxes on the hybrid model’s electric power sector: (A) net generation by fue; (B) components of average cost of net generation; (C) electric sector activities; and (D) activity prices.

Fig. 10. Sensitivity of the hybrid model to values of sCAP: (A) marginal abatement cost curves (sGEN ¼ 10); (B) welfare losses (sGEN ¼ 10); (C) marginal abatement cost curves (sGEN ¼ 5); and (D) welfare losses (sGEN ¼ 5).

Table 5 illustrates the differences between the top-down and hybrid models’ substitution responses to the tax. The changes in the demand for coal are similar in both models. However, the substitution possibilities within the top-down

Fig. 7. The evolution of generating capacity by technology in the hybrid model: (A) capacity rent, and (B) capacity level.

Fig. 1. The structure of production in the non-electric sectors: (A) nonprimary sectors; and (B) primary (resource) sectors.

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "The synthesis of bottom-up and top-down approaches to climate policy modeling: electric power technologies and the cost of limiting us co2 emissions" ?

This paper incorporates technology detail into the electricity sector of a computable general equilibrium model of the US economy to characterize electric power ’ s technological margins of adjustment to carbon taxes and to elucidate their general equilibrium effects. Compared to the top-down production function representation of the electricity sector, the technology-rich hybrid specification produces less abatement at a higher welfare cost, suggesting that bottom-up models do not necessarily generate lower costs of abatement than top-down models. 

Q2. What are the future works in "The synthesis of bottom-up and top-down approaches to climate policy modeling: electric power technologies and the cost of limiting us co2 emissions" ?

The results show that, for a given degree of optimism regarding the substitution possibilities in electricity production, the welfare costs of emission taxes in a hybrid model with a technologically rich description of the electric power sector generally exceed those in a top-down model in which the sector is represented by a smooth production function. While macroeconomic costs are affected by the substitutability of electricity generation technologies in their ability to supply different categories of load, it appears that the crucial factor is the ease with which existing capacity in relatively high-cost technologies may be retired or with which new capacity in relatively lowcost technologies can be added in the short run. Ultimately, these elements need to be combined in a framework which can be used to estimate the elasticity of capacity transformation. Hopefully, the contribution of this paper will be to encourage more researchers to explore these vitally important issues. 

Q3. What is the trick used to adjust the endowments of technologyspecific capital?

The trick used to adjust the endowments of technologyspecific capital is to model v K ;y as partially reversible, with retirement being the transformation of existing capacity into malleable capital, and retrofit being the transformation of malleable capital into additional capacity. 

Q4. What does the effect of the price of fossil fuels have on the output of non-energy?

Fossil-fuel price increases also have the effect of inducing substitution away from non-energy inputs, which mitigates both the inter-sectoral transmission of higher energy prices and the associated reductions in the output of non-energy sectors. 

Q5. What is the key control variable in MARKAL-type bottom-up simulations?

To appreciate the importance of capacity malleability, consider that in MARKAL-type bottom-up simulations the levels of capacity in energy supply technologies are the key control variable. 

Q6. Why was the CES function specified in the hybrid model?

large baseline value for the generation elasticity was specified in the hybrid model (sGEN ¼ 10) so as not to unduly constrain technology substitution. 

Q7. What is the effect of sCAP on the aggregate cost of reducing emissions?

although discretizing the top-down model’s smooth production function for electric power reduces the aggregate substitutability of the model’s supply side, which decreases the quantity of aggregate abatement, the result is only a small effect on the aggregate cost of reducing emissions. 

Q8. What are the effects of the changes in the output of non-energy sectors?

These changes translate into much smaller reductions in the output of non-energy sectors: between 6 and 17 percent in electric power, 1 and 4 percent in energyintensive industries and transportation, less than 2 percent in other manufacturing industries and agriculture, and less than 1 percent in the service and rest-of-economy sectors. 

Q9. What is the correct specification of capacity adjustment?

The most theoretically correct specification of capacity adjustment is found in dynamic general equilibrium simulations based on the Kuhn–Tucker conditions of the standard Hayashi–Summers profit maximization problem of a forward-looking producer (e.g., Frei et al., 2003). 

Q10. What is the CES function for the non-resource sectors in panel A?

for the non-resource sectors in panel A, output (yj) is a CES function of a composite of labor and capital inputs (KLj) and a composite of energy and material inputs (EMj).