Econometric General Equilibrium Modeling

The point of departure for the study of the impact of energy and environmental policies is the neo-classical theory of economic growth formulated by Cass (1965) and Koopmans (1967). The long-run properties of economic growth models are independent of energy and environmental policies. However, these policies affect capital accumulation and rates of productivity growth that determine the intermediate-run trends that are important for policy evaluation. Heterogeneity of different energy producers and consumers is critical for the implementation of energy and environmental policies. To capture this heterogeneity it is necessary to distinguish among commodities, industries, and households. Econometric methods are essential for summarizing information on different industries and consumer groups in a form suitable for general equilibrium modeling. In this paper we consider the application of econometric general equilibrium modeling to the U.S., the economy that has been studied most intensively. The framework for our analysis is provided by the Intertemporal General Equilibrium Model (IGEM) introduced by Jorgenson and Wilcoxen (1990). The new version of the IGEM presented in this paper is employed for the evaluation of proposed legislation on climate policy by the U.S. Environmental Protection Agency (2011).