Edited by Joanne Evans and Lester C. Hunt
Chapter 14: Computable General Equilibrium Models for the Analysis of Energy and Climate Policies
Computable general equilibrium models for the analysis of energy and climate policies Ian Sue Wing* 1 Introduction This chapter is a simple, rigorous, practically oriented exposition of computable general equilibrium (CGE) modeling. The general algebraic framework of a CGE model is developed from microeconomic fundamentals, and employed to illustrate how a model may be calibrated using the economic data in a social accounting matrix, how the resulting system of numerical equations may be solved for the equilibrium values of economic variables, and how computing the perturbations to this equilibrium that result from introducing price or quantity distortions facilitates analysis of the economy-wide impacts of energy and climate policies. Walrasian general equilibrium prevails when supply and demand are equalized across all of the interconnected markets in the economy. CGE models are simulations that combine the abstract Arrow–Debreu general equilibrium structure with realistic economic data to solve numerically for the quantities and prices of reproducible commodities and non-reproducible factors that support equilibrium across a specified set of markets. CGE models have emerged as a standard pseudo-empirical tool for policy evaluation. Their strength lies in their ability to prospectively elucidate the character and magnitude of the economic impacts of energy and environmental policies. Perhaps the most important of these applications is the analysis of measures to reduce greenhouse gas (GHG) emissions – principally carbon dioxide (CO2) from the combustion of fossil fuels. The decade since the survey by Bhattacharyya (1996) has seen an explosion of work in this area, with more than...
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