The Second Generation Model The Second Generation Model US Environmental Protection Agency Science...

The Second The Second Generation ModelGeneration Model

The Second The Second Generation ModelGeneration Model

US Environmental Protection Agency

Science Advisory Board

SAB-SGM Advisory Panel

Jae Edmonds, Ron Sands, Hugh Pitcher, Antoinette Brenkert

04 February 2005US Environmental Protection AgencyWashington, DC

2

OverviewOverviewOverviewOverview

Model Structure and Purpose

Hybrid Input-Output Table

International Trade

Production, Expectations and Market Clearing in the SGM

Access to the Model

3

SGM OriginsSGM OriginsSGM OriginsSGM Origins

The SGM is a computable general equilibrium model of an economy Original design began in 1988—at a time when there

were no CGE models in use to address climate change

Designed as a complement to the Edmonds-Reilly model—a long-term partial equilibrium model

Designed from the problem back to the model. Primary focus was on emissions of greenhouse

gases including CO2 from energy and land-use emissions and non-CO2 greenhouse gases

Time frame: 5-50 years into the future

4

MiniCAM-SGM RelationshipMiniCAM-SGM RelationshipMiniCAM-SGM RelationshipMiniCAM-SGM Relationship

MiniCAM Simpler, long-term, partial equilibrium model Test bed for new ideas

SGM Computable general equilibrium

Energy-economy and other interactions matter More detailed framework than MiniCAM

Medium term (5-year time steps, 50-year time horizon)

Tracks capital stocks by vintage

5

The SGMThe SGMThe SGMThe SGM

The SGM is a simple model at its base Implements an

Economics 101 circular flow diagram

Sectors chosen for emphasis reflect a concern for the climate issue in general and the emissions of GHG’s in particular

Final Goods and Services

Primary Factors of Production

Purchases of Final Goods and Services

Payments to Primary Factors of Production

Final Demand Sectors

Government

general government services

policy intervention

Households

demographic decisionslabor supply decisions

savings decisionsconsumer demand

ownership of landownership of capitalownership of mineral

resources

Energy Production & Transformation

crude oil productionnatural gas production

coal productionhydrogen productionelectricity production

oil refiningnatural gas distribution

Industrial Production & Inter-industry Transactions

Industry & Services

paper and pulpchemicals

primary metalsfood processingother industry &

constructionthe service sector

Transportation

passenger transportfreight transport

Agriculture-Land Use

grains and oil cropsanimal products

forestrybiomass productionother agriculturecarbon storage

Greenhouse Related

Emissions

Greenhouse Related

Emissions

6

Global Fossil Fuel Carbon Global Fossil Fuel Carbon Emissions 1999Emissions 1999

Global Fossil Fuel Carbon Global Fossil Fuel Carbon Emissions 1999Emissions 1999

1,251

2,723

2,229

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Tg

C/y

GAS FLARINGCEMENTCOAL and other solidsOIL and other liquidsNATURAL GAS

total 6,457

Source: Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory.

Fossil fuel use (6.5 PgC/y in 1999) Natural gas 13.7 TgC/EJ Oil 20.2 TgC/EJ Coal 25.5 TgC/EJ

Industrial process emissions (e.g. cement) 0.2 Pgc/y

Land-use change emissions (1.7; 0.6-2.6 PgC/y) Deforestation Soil cultivation

7

SGM Production ActivitiesSGM Production Activities

Crude oil production Wood productsNatural gas production ChemicalsCoal production Non-metallic mineralsCoke and coal products Ferrous metalsElectricity generation Non-ferrous metals

oil-fired Other industrygas-fired Passenger transportcoal-fired Freight transportnuclear Grains and oil seedshydro Animal productsadvanced technologies Forestry

Oil refining Food processingGas distribution Other agriculture

Services (everything else)

8

Fossil Fuel Carbon EmissionsFossil Fuel Carbon Emissions19991999

Fossil Fuel Carbon EmissionsFossil Fuel Carbon Emissions19991999

SGM RegionsUSA,Western Europe, China, former Soviet Union, Japan, India, Canada, South Korea, Mexico, Eastern Europe, Australia/New Zealand, Brazil, Middle East, Rest of World

Source: Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory.

1,500

981

771

392

315294

1,021

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Tg

C/y

196 OTHER COUNTRIES

INDONESIA

BRAZIL

ISLAMIC REPUBLIC OF IRAN

SOUTH AFRICA

AUSTRALIA

UKRAINE

MEXICO

REPUBLIC OF KOREA

CANADA

INDIA

JAPAN

RUSSIAN FEDERATION

CHINA (MAINLAND)

EUROPEAN UNION (25)

UNITED STATES OF AMERICA

total 6,122

50%

67%

75%

83%

9

Key IdeasKey IdeasKey IdeasKey Ideas

Emissions—energy, ag-land-use, otherProduction functions—why CES?Energy production Resources-reserves

Energy consumption Model sectors—chosen because they have emissions that

matter Households—energy services & transport Sector-subsector

Fuels matter Energy-emissions coefficients

Region choice—emissions today and tomorrowTime scale—5-50 years Complementarity with MiniCAM Need for vintaged capital stocks

10

Key FeaturesKey FeaturesKey FeaturesKey Features

14 regions of the world USA, Canada, Mexico, Western Europe, Eastern Europe, former

Soviet Union, China, India, Brazil, Japan, South Korea, Australia/New Zealand, Middle East, Rest of World

Can be operated in single region mode

Many regional models are developed in collaboration with in-country researchers

5-year time steps from 1990 to 2050

7 Greenhouse Gases CO2, CH4, N2O, HFCs, HFC-23, PFCs, SF6

11

Regional PartnershipsRegional PartnershipsRegional PartnershipsRegional Partnerships

SGM regions are developed with regional partnersRegional researchers have the best understanding of their regional data, institutions, market structure, and trendsRegional partnerships have helped shape the development of most SGM regions

12

Energy Supply in the SGMEnergy Supply in the SGMEnergy Supply in the SGMEnergy Supply in the SGM

Finite resources use a resource-reserve-production modelProduction occurs out of reservesEach period producers bring new reserves on

line from the resource base based on expected profitability

The resource base is gradedProduction can occur from more than one

grade of the resource simultaneously

13

Anthropogenic GHGsAnthropogenic GHGsAnthropogenic GHGsAnthropogenic GHGs

14

Mapping Emissions from Mapping Emissions from Production SectorsProduction Sectors

Mapping Emissions from Mapping Emissions from Production SectorsProduction Sectors

Gas Source # Emissions Source Associated Production Sector

1 Oil Combustion 2 - Crude oil production 2 Gas Combustion 3 - Natural gas production CO2 3 Coal Combustion 4 - Coal Production

4 Coal Production 4 - Coal Production 5 Enteric 21 - Other agriculture 6 Natural Gas Systems 10 - Distributed gas 7 Oil Systems 2 - Crude oil production 8 Landfills 1 - Everything else 9 Manure 21 - Other agriculture

10 Other Agricultural Methane 21 - Other agriculture 11 Other Non-Agricultural Methane 1 - Everything else

CH4

12 Wastewater 1 - Everything else

HFC-23 13 HFC-23 1 - Everything else

HFCs 14 Ozone Depleting Substances Substitutes 1 - Everything else

15 Industrial Processes 1 - Everything else 16 Manure 21 - Other agriculture 17 Mobile Source 1 - Everything else 18 Soil 21 - Other agriculture

N2O

19 Stationary Source 1 - Everything else

20 Aluminum 1 - Everything else PFCs

21 Semiconductor 1 - Everything else

22 Electricity Distribution 6 - Electricity generation SF6

23 Magnesium 1 - Everything else

15

Technology Matters to the Technology Matters to the AnswerAnswer

Technology Matters to the Technology Matters to the AnswerAnswerTotal Policy Cost

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

Cos

t (T

rillion

$90

US)

Individual Technologies

Binary Technologies Cominations

Multiple Technology Cominations

MiniCAM Output: Limitation of GMST to 2oC

16

Technology Vintages in the Technology Vintages in the SGM (1)SGM (1)


Technology is embodied in the SGM’s production functionsTechnology is tracked by vintageExisting technology vintages produce as long as they can cover their operating costs Each existing technology is associated with a level of

capital investment that constrains total production

17



New technologies are chosen from the ex ante technology possibility frontier Technologies are chosen based on expected

profitability Expectations are treated explicitly in the model (The

default is myopic foresight, but others have been tried)

The level of investment in the technology depends on expected profitability

Aggregate investment in the sector depends on expected demands for the sector

18



The capital market balances the demands and supplies for loanable funds Existing capital stocks are associated with a specific

production function (technology) and cannot move from sector to sector

Only new investments are perfectly malleable The interest rate clears the market

19

Production FunctionsProduction FunctionsProduction FunctionsProduction Functions

All goods are produced with either a non-nested Constant-Elasticity-of-Substitution (CES) production function New investment within the electricity sector (e.g.,

new coal, gas, oil, etc.) is allocated based on a logit sharing mechanism

or Leontief production function For production functions with elasticities of

substitution < 0.05 Oil refining Electricity generation from its various energy sources

20

Technological ChangeTechnological ChangeTechnological ChangeTechnological Change

Set of parameters that can be used to simulate technical change over time for production sectors Separate parameters are available for each input to

each production process (and each vintage)

Parameters that determine energy, land, labor, and capital productivity, i.e., non-neutral technical change Labor productivity parameters are the primary

determinant of economic growth Both energy efficiency and labor productivity

parameters can be altered to construct reference scenarios

21

The DetailsThe DetailsThe DetailsThe Details

Ron Sands Hybrid data structure Trade in SGM

Hugh Pitcher Production New technologies, vintage structure & expectations Solution mechanism

Lots of discussion

Hybrid Input-Output TableHybrid Input-Output TableHybrid Input-Output TableHybrid Input-Output Table

23

TerminologyTerminologyTerminologyTerminology

The term “hybrid” refers to model input data and not model structure No code changes needed Does not limit form of production function

The input-output table used to calibrate SGM base year uses hybrid units Joules for energy flows Base-year currency (e.g., 1990 US$) for all other goods

Reference: Miller, R. and P. Blair, Input-Output Analysis, Prentice-Hall, 1985, pp. 200-235. (Chapter 6, “Energy Input-Output Analysis”)

24

MotivationMotivationMotivationMotivation

Carbon dioxide emissions are tied closely to energy flows

Energy balance tables are the best source of data on energy flows Energy balance tables are actually energy input-output tables Can construct energy “use” and “make” tables

One price for each energy commodity ensures quantity balance during model operation Energy commodities are relatively homogeneous Strict energy accounting

25

Typical Energy Balance TableTypical Energy Balance TableTypical Energy Balance TableTypical Energy Balance Table

energy inputs (fuels)

productionimportsexports

electricity generationoil refiningcoking

agricultureindustrytransportresidential buildingscommercial buildings

sources

energy transformation

final consumption

26

Data SourcesData SourcesData SourcesData Sources

Base-year input-output table Locally produced and in local currency, if available Otherwise a composite in US dollars

Base-year energy balances Locally produced, if available International Energy Agency

Engineering parameters and costs for electric generating technologies

27

Composition of Hybrid Use Composition of Hybrid Use Table (United States)Table (United States)

Composition of Hybrid Use Composition of Hybrid Use Table (United States)Table (United States)

energy balances

technology parameters

economic input-output table

crude oilnatural gascoalcokeelectricityrefined petroleumdistributed gaswood productschemicalsnon-metallic mineralsferrous metalsnon-ferrous metalsother industrypassenger transportfreight transportgrains and oil seedsanimal productsforestryfood processingother agricultureservices (everything else)

landlaborcapital

electricity generation

factors

joules

dollars

joules

dollars dollars dollars

dollars dollars dollars

joules joules

oil p

rodu

ctio

n

gas

prod

uct

ion

coal

pro

duct

ion

coke

activities

petr

oleu

m r

efin

ing

gas

dist

ribu

tion

oil-f

ired

gas-

fired

coal

-fire

d

nucl

ear

hydr

o

woo

d pr

oduc

ts

chem

ical

s

non-

met

allic

min

eral

s

ferr

ous

met

als

non-

ferr

ous

me

tals

com

mo

ditie

s

othe

r in

dust

ry

pass

eng

er tr

ansp

ort

frei

ght t

rans

port

gra

ins

and

oil s

eeds

anim

al p

rodu

cts

fore

stry

food

pro

cess

ing

othe

r ag

ricul

ture

serv

ices

(E

TE

)

cons

umer

gove

rnm

ent

inve

stm

ent

expo

rts

impo

rts

finaldemand

International TradeInternational TradeInternational TradeInternational Trade

29

OverviewOverviewOverviewOverview

Current Configuration Single Region Global Operation

Design ConsiderationsStatus of Model Development Comprehensive revision of input data Theoretical considerations

30

Single-Region ConfigurationSingle-Region ConfigurationSingle-Region ConfigurationSingle-Region Configuration

Types of commodities Numeraire good (large services sector) is tradable Other tradables (crude oil, natural gas, emissions permits) Trade in remaining goods is fixed at base-year quantity

Prices Numeraire price set equal to 1.0 in each period Crude oil and gas price set exogenously (can vary by time period) Other prices solved endogenously each time period

Emissions Permits Can be traded in a regional market (endogenous price) Can be a traded in a global market (exogenous price)

Balance of payments constraint Specified as an exogenous capital flow (can vary by time period) Any increase in imports must be paid for with exports of another tradable

31

Global ConfigurationGlobal ConfigurationGlobal ConfigurationGlobal Configuration

Configuration for recent Energy Modeling Forum studies Emissions permits trade globally or in regional blocks, depending on policy

scenario Otherwise, each region operates in same way as its regional configuration

Numeraire, crude oil, natural gas are tradable Trade in other goods is fixed at base-year quantity Regional balance of payments constraint

Crude oil and natural gas prices set exogenously on a scenario basis

Many SGM regions modeled in local currency (USA, India, China, Canada, Mexico, Japan, S. Korea)Trade takes place between each region and a global market

Exogenous exchange rate converts world price of traded good to local price (set to base-year market exchange rate)

No attempt to track bilateral trade

32

Design ConsiderationsDesign ConsiderationsDesign ConsiderationsDesign Considerations

Full global trade in crude oil and natural gas Revisit fossil supply methodology (especially Middle East) Calculation of terms-of-trade component in the cost of a climate policy

Full global trade in agricultural products Draw from Battelle-PNNL experience with partial-equilibrium Agriculture

and Land Use (AgLU) model Commodity flows calibrated to base-year food balance tables from UN

Food and Agriculture Organization

Full global trade in energy-intensive goods Shift in production capacity across regions in response to a climate

policy Carbon leakage

33

Development ActivitiesDevelopment ActivitiesDevelopment ActivitiesDevelopment Activities

Comprehensive revision of input data Selective use of GTAP data

Greater coverage of input-output tables Consistent base-year trade data across regions

Automate data preparation process Methodology to move input-output table to a different base year Develop data templates applicable to all regions Organize data on national income accounts into a social accounting

matrix

Evaluate alternatives Fossil energy supply Trade in energy-intensive goods

Production, Expectations and Production, Expectations and Market Clearing in the SGMMarket Clearing in the SGM


35



Production technology representationCombining technologies (nesting)Expectations and InvestmentSolving the model

36

ProductionProductionProductionProduction

All technologies use either a flat CES or Leontief production function (no nested CES functions) 0 is constrained to be one All technical change occurs through changes in the i

Technologies produce at original capacity until they are retired either by reaching their physical or economic lifetime (they may operate at lower capacity if rate of return is low)

Nested energy bundles will not preserve energy balance

/1

10 )()(

N

iiiXαq x

37

Technology CharacteristicsTechnology CharacteristicsTechnology CharacteristicsTechnology Characteristics

Technologies have larger elasticities of substitution at the point of investment than in subsequent periods Putty-semi putty (or putty-clay) formulation Investment value chosen to be representative of

literature—operation value chosen to meet energy conversion constraints (0.1 or lower)

Fixed physical lifetime (typically twenty years with no life extension)A vintage has a fixed capacity until it is retiredNew technologies can be made available in future periods

38

Technology (2)Technology (2)Technology (2)Technology (2)

Technologies are represented as a series of vintages—each with its own capital stock which can be operated at full capacity, part capacity or prematurely retired depending on current period profit rateProfits in the SGM are defined as revenue minus variable costs

39

Parameterization Process for Parameterization Process for Existing TechnologiesExisting Technologies

Parameterization Process for Parameterization Process for Existing TechnologiesExisting Technologies

Exogenous value for elasticity of substitutionUse IO data and functional specification to derive remaining technology parametersNon-neutral technical change values can be used to tune energy technologies to match EIA forecastSector specific discount factor derived from historical sector level investments and the investment equation

40

New TechnologiesNew TechnologiesNew TechnologiesNew Technologies

Engineering cost studies are the primary source of data on new technologiesIssues: Optimism about costs Breaking out inputs into SGM sectors Consistency of discount rates and prices

Technologies have individual discount rate which reflects sub-sector specific factor plus cost of capital from capital market

Level playing field—Existing technologies reflect additional costs, such as transmission and distribution expenses, regulatory requirements, etc.

41

New Technology (2)New Technology (2)New Technology (2)New Technology (2)

Start up is an issue Single digit nameplate problem Penetration rates for new technologies

Assigning technology specific discount factorNesting or other sub-sectors that the technology competes with directly

42

Key Lessons Learned (1)Key Lessons Learned (1)Key Lessons Learned (1)Key Lessons Learned (1)

Neutral technical change in energy transformation technologies leads to violations of the conservation of energy principle For example, consider a petroleum refinery that

presently converts 80 percent of crude to refined product

Under a one percent per year neutral technical change assumption, after 25 years, the refinery will convert 103 percent of crude to refined product

Solution Only non-neutral technical change This allows capital and labor efficiency to increase but

maintains physical limits

43

Key Lessons Learned (2)Key Lessons Learned (2)Key Lessons Learned (2)Key Lessons Learned (2)

Elasticities of substitution in the range of the literature (say .3 to .5) in the presence of carbon prices can result in implied technologies that violate the second law of thermodynamics Existing coal fired electricity plant operating at 33%

efficiency Carbon price of $300 a ton

Elasticity of Substitution = .5 => Efficiency of 75% Elasticity of Substitution = .05 => Efficiency of 34.5%

Solution: Existing energy technologies have sharply limited elasticities of substitution or are Leontief once installed

44

Key SGM CharacteristicsKey SGM CharacteristicsKey SGM CharacteristicsKey SGM Characteristics

Technological change in the SGM under a greenhouse gas mitigation strategy is primarily a matter of shifting across technologiesThe model manages GHG emissions by introducing new technology, not by improving existing technology—essentially bottom upThis approach requires explicit new technologies and maintains physical consistency between energy inputs and outputs

45

Advantages of SGM approachAdvantages of SGM approachAdvantages of SGM approachAdvantages of SGM approach

The model can maintain a fully consistent energy balance table across time New technologies have to be explicitly identified and parameterizedThere is no vague implicit or explicit backstop technologyThe value of new technology can be assessedExplicit representations of technologies enable consideration of additional characteristics of a technology—e.g. safety or local air pollution

46

DisadvantagesDisadvantagesDisadvantagesDisadvantages

Non-standard production characterization makes it difficult to use existing literature on parameter values—i.e. estimates of technical change based are two-digit industries are of limited valueIt is difficult to foresee technology characteristics beyond the current set of potential new options (What comes after IGCC with capture and disposal?)

47

Nesting of TechnologiesNesting of TechnologiesNesting of TechnologiesNesting of Technologies

The specific nature of technologies requires a mechanism to shift across technologiesWe use a logit approach to share investment across technologies within a sectorA flat logit approach violates dominanceA logit approach based on expected profits prevents peak load technologies from entering into production—therefore we are using expected costs

48

Why Logit Sharing Rather than Why Logit Sharing Rather than Nested CES?Nested CES?

Why Logit Sharing Rather than Why Logit Sharing Rather than Nested CES?Nested CES?

Logit mechanism maintains mass balance if components are consistentIt is more flexible than a CES nest It does not require all inputs (subsectors) to be

positive

Logistic sharing does imply equal risk adjusted marginal returns within the industry

49

The Electricity Sector NestThe Electricity Sector NestThe Electricity Sector NestThe Electricity Sector Nest

Electricity Generation SGM-2004 nesting option

Hydro

Nuclear

Oil Gas

Coal

Solids (commercial biomass)

Wind-on shore

Solar

Geo

Wind-off-shore

Waste (municipal)

PCccsCoal IGCC

NGCC

Coal IGCCccs

NGCCccs

Coal IGCC Coal

Peak load Base load

Gas NGCC

50

ExpectationsExpectationsExpectationsExpectations

Expectations enter into production sector decision making through the investment processThe model computes either expected cash flow or levelized costs using current and future prices over the lifetime of the investmentAt present, future prices are projected to be the same as current prices (myopic expectations)Levelized costs (expected profits) are computed using a discount rate which is the sum of price of capital and a sector specific discount factor

51

Expectations and InvestmentExpectations and InvestmentExpectations and InvestmentExpectations and Investment

Current investment produces under the same price and output as used to make the investment decision (Expectations are realized in the first period)Current investment is driven by a scale factor representing either

(1) previous investment or (2) expected output

current period expected cash flow per dollar of investment

Investment in subsectors is allocated by a logistic process using subsector levelized costs (or expected profits) as arguments

52

Dynamic ExpectationsDynamic ExpectationsDynamic ExpectationsDynamic Expectations

A simple trend extrapolation experiment failed due to instabilityWe plan experiments using simulated values as the basis for price expectationsThe role of current investment in equating supply and demand may limit potential options

53

Solution MechanismSolution MechanismSolution MechanismSolution Mechanism

At solution, supply and demand for each market are equal to within the tolerance given to solution mechanism (typically .01%) Solution requires consistent model in order to solve—budget equations for all decision makers must holdFunctions rapidly and reliably as long as the problem posed to the model can be solved using available technology options => low to medium carbon price Single region run time 1-2 minutes Global run <10 minutes

54

Access to the SGMAccess to the SGMAccess to the SGMAccess to the SGM

1. http://www.globalchange.umd.edu/?models

2. http://www.globalchange.umd.edu/sgmrelease.php

3. http://www.globalchange.umd.edu/models/download/

SGM Users Guide I

http://www.globalchange.umd.edu/?models

http://www.globalchange.umd.edu/sgmrelease.php

http://www.globalchange.umd.edu/models/download/

\Exec

\SGM_US_A

\Inputs

\Outputs

\USInputs

\Paths

sgmctrl.csv

RunSGM_US.xlsDataViewer_US.xls

SGM.exe

CE policy files

US-specific input files

sgmgen2004_us.csv files

sgm_us.mbd

\screen.csv

datamover.exe

DONE.csvddao36.dll: required but Microsoft owned

Legal Notice.txt

SGM_output.xls files

56

RunSGM_US.xls Scenario Examples

USA baseline US CE$100 US CEstab2015

..\inputs\USinputs\usa_baseline_2004_A.csv



..\inputs\screen.csv ..\inputs\paths\us_CE_$100.csv

..\inputs\paths\us_CEstab2015.csv

..\inputs\USInputs\non-CO2_MACs_US.csv

..\inputs\USInputs\non-CO2_MACs_US.csv

..\inputs\screen.csv ..\inputs\screen.csv

57

Dataviewer_US.xlsExample of Single Query Output

Scenario Emission Comparison

0

500

1000

1500

2000

2500

3000

3500

1990 2000 2010 2020 2030 2040 2050

Time

Car

bo

nD

ioxi

de

Em

issi

on

s (M

MT

C) USA baseline

US CE$100

US CEstab2015

58

Carbon-Equivalent Emissions

0

500

1000

1500

2000

2500

3000

3500

4000

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Time

MM

TC

Mg ElecDist SemiconducAluminum StationarySoilN MobileN ManureN IndProcsN ODSSub HFC23 WastewaterOthNonAgMeOthAgMeth Manure Landfills OilSys NatGasSys Enteric CoalPr Coalcomb Gascomb Oilcomb

Example of SGMgen2004_US output

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