IGEM, an Inter-temporal General Equilibrium Model of the U.S. Economy with Emphasis on Growth, Energy and the Environment

Transcription

1 IGEM, an Iner-emporal General Equilibrium Model of he U.S. Economy wih Emphasis on Growh, Energy and he Environmen Richard J. Goele Mun S. Ho Dale W. Jorgenson Daniel T. Slesnick Peer J. Wilcoxen July 2007 Prepared for he U.S. Environmenal Proecion Agency (EPA) Office of Amospheric Programs Climae Change Division EPA Conrac EP-W

2 Table of Conens 1. The Ineremporal General Equilibrium Model (IGEM) 1.1. Overview of he model 1.2. The producion and supply of commodiies 1.3. Household model 1.4 Invesmen and he cos of capial 1.5 Governmen 1.6 Res of he world (expors, impors and oal supply) 1.7 Marke balance 1.8 Daa underlying he model 2. Projecions of exogenous variables 3. Emissions projecions and abaemen opporuniies in IGEM 3.1. Inroducion 3.2. Emissions projecions 3.3. Endogenizing exogenous abaemen opporuniies 4. A base case simulaion References Figure 1, 2 and 3 are appended herein. Tables 1 hrough 9 appear in IGEM Documenaion Tables Figures 4 hrough 16 appear in IGEM Documenaion - Figures 2

3 1. The Iner-emporal General Equilibrium Model (IGEM) 1.1. Overview of he Model The Ineremporal General Equilibrium Model (IGEM) is a dynamic model of he U.S. economy which describes growh due o capial accumulaion, echnical change and populaion change. I is a muli-secor model ha racks changes in he composiion of indusry oupu, as well as changes in inpu mix used by each indusry, including energy use. I also depics changes in consumpion paerns due o demographic changes, price and income effecs. The main driver of economic growh in his model is capial accumulaion and echnological change. Capial accumulaion arises from savings of a household ha is modeled as an economic acor wih perfec foresigh. Aggregae household consumpion and savings are chosen o maximize a uiliy funcion ha is a discouned sum of he sream of fuure consumpion. Wihin each period, he consumpion or demand side of he model is driven by a deailed model of household demand ha includes demographic characerisics. The producion or supply side of he model characerizes he indusrial srucure in deail. 35 indusries are idenified, of which 21 are manufacuring and 5 are energy relaed, hese are lised in Table 1. Each indusry produces oupu using capial, labor, energy and non-energy inermediae inpus using consan reurns o scale echnology. The producion echnology used changes over ime due o boh exogenously specified changes and endogenous changes from price effecs. Coal, refined oil and gas are separaely idenified energy inpus. The oupu from domesic indusries is supplemened by impors from he res of he world o form he oal supply of each commodiy. There are four main secors of he economy in IGEM: business, household, governmen and he res of he world. The flow of goods and facors among hese secors is illusraed in Figure 1. The boxes on he righ side of he diagram represen he five groups on he demand side for commodiies -- consumpion, invesmen, governmen, expors and inermediae purchases. The business secor is represened by he boxes on he lef; labor, capial and inermediae inpus flow ino he producer box, and domesic 3

4 commodiies flow ou. All markes for goods and facors are assumed o be compeiive. Prices of commodiies adjus o equae he supply from domesic and foreign producers o he demand in each period, as represened a he boom of Figure 1. This model is implemened economerically, by which is mean ha he parameers governing he behavior of producers and consumers are saisically esimaed over a ime series daase ha is consruced specifically for his purpose. This is in conras o many oher muli-secor models ha are calibraed o he economy of one paricular year. These daa are based on a sysem of naional accouns developed by Jorgenson (1980) ha inegraes he capial accouns wih he Naional Income Accouns. These capial accouns include an equaion linking he price of invesmen goods o he sream of fuure renal flows, a link ha is essenial o modeling he dynamics of growh. This model is an exension and revision of he one used in Jorgenson and Wilcoxen (1993), and Ho and Jorgenson (1994) o analyze environmen and rade policies 1. The following secions describe he main feaures of he model The producion and supply of commodiies. Energy consumpion per person, like mos goods, depends on he price of energy and he level of income. These, in urn, ulimaely depend on echnology, and o some exen, on world supplies. General progress in echnology means a rising level of real incomes, progress in paricular energy echnologies means lower energy prices or lower energy requiremens. A careful specificaion of producer behavior and echnical change is hus essenial for analyses of fuure energy rends and responses o energy and environmenal policies. The response of firms o changes in prices deermines o an imporan degree he abiliy of he producers o subsiue oher inpus for energy. In he long run, produciviy growh allows boh higher personal consumpion and polluion reducion. The exac specificaion and parameerizaion of he producion and echnical change are herefore very imporan and described in deail in his secion. The business secor of he model is subdivided ino 35 indusries as lised in Table 1. There are wo addiional secors ha are no privae businesses, bu also hire labor and 1 Jorgenson and Wilcoxen (1993) is reprined as Chaper 1 of Jorgenson (1998), and Ho and Jorgenson (1994) is Chaper 8. 4

5 capial, hese are he governmen and household secors. There are 21 manufacuring indusries, 4 mining indusries, and 1 ransporaion indusry. Five of he indusries are labeled as energy producers, Coal Mining (indusry 3), Oil and Gas Exracion (4), Peroleum Refining (16), Elecric Uiliies (30) and Gas Uiliies (31). Seven are classified as inensive energy using indusries, hese are indusries wih value share of energy inpus in oal oupu exceeding 4% in The oupu of he business secor also is subdivided ino 35 commodiies; each commodiy is he primary produc of one of he indusries. Many indusries produce secondary producs as well, for example, Peroleum Refining produces commodiies ha are he primary oupu of he Chemicals indusry. Join producion of his kind is allowed for in he model. The echnology of each indusry is represened by means of an economeric model of producer behavior. As noed in he Inroducion he parameers of hese producion funcions are esimaed over a daabase consruced for his purpose, based on a sysem of naional accouns developed by Jorgenson (1980). This daabase includes a ime series of iner-indusry ransacions ables covering he period These inpu-oupu (IO) ables consis of a use marix and a make marix. The use marix gives he inpus used by each indusry -- inermediae commodiies, noncompeing impors, capial and labor. I also gives he commodiy use by each caegory of final demand -- consumpion, invesmen, governmen, expors and impors. The use marix is illusraed in Figure 2. The make marix gives he amoun of each commodiy produced by each indusry and is illusraed in Figure 3. The IO ables include he value of capial and labor inpu. The sysem of accouns includes a division of his value ino price and quaniy. The quaniy of capial inpu is consruced by aggregaing over a deailed se of capial asses, ranging from compuers o office buildings. Similarly he quaniy of labor inpu is consruced by aggregaing over demographic groups, ranging from young workers wih high school educaion o old workers wih masers degrees. (A deailed descripion of he mehods o calculae capial and labor inpu, and he daa sources, is given in he Jorgenson, Ho and Siroh (2003)). The approach of calculaing inpus by aggregaing over deailed caegories and economerically esimaing producion funcion parameers over a ime series daase 5

6 sands in conras o mos oher muli-secor models, saic or dynamic. A simple sum of capial socks will have ignored he rapidly rising raio of compuers o srucures, a phenomenon ha is capured by IGEM s index of capial inpu. Similarly, a simple sum of labor hours ignores he rising raio of college educaed o non-college workers, which raises IGEM s quaniy index of labor inpu subsanially. The common mehod of calibraing he use of inermediae inpus o one year s IO marix, insead of using an enire ime series, ignores he changing paern of inpu use. A parallel assumpion ha is ypically made is ha inpu-oupu maerial coefficiens are fixed, i.e., here is no subsiuion beween seel and plasic, for example. 2 IGEM s approach does no impose such assumpions as i embodies esimaes of he elasiciies of subsiuion among producive inpus using ime series daa Noaion The general sysem of noaion wihin IGEM employs Roman leers for economic variables and Greek leers for esimaed model parameers. The subscrip denoes ime, i indexes commodiies and j indexes indusries. Q j P Q,j P QT,j X i,j X Pi K j Lj E j M j P E,j P M,j P K,j P L,j v QC P C, i i quaniy of oupu of indusry j price of oupu o producer in indusry j price of oupu o purchasers from indusry j quaniy of commodiy inpu i ino indusry j price of commodiy i o buyers quaniy of capial inpu ino j quaniy of labor inpu ino j index of energy inermediae inpu ino j index of oal nonenergy inermediae inpu ino j price of energy inermediae inpu ino j price of oal nonenergy inermediae inpu ino j price of oal capial inpu o indusry j price of oal labor inpu o indusry j value shares quaniy of domesically produced commodiy i price of domesically produced commodiy i 2 Some models specify a Cobb-Douglas form for maerial inpus insead of his Leonief syle fixed coefficiens. This means ha he elasiciy of subsiuion is assumed o be one. In conras, he approach in IGEM esimaes he elasiciies of subsiuion, allowing hem o be differen among inpus and indusries. 6

7 M j,i MAKE marix; value of commodiy i made by indusry j Top ier producion funcion wih echnical change The producion funcion may be expressed absracly as producing oupu from capial, labor, m inermediae inpus, non-compeing impors (X N ) and echnology (), and hus for indusry j: (1) Q j f ( K j, L j, X 1, j, X 2, j,... X m, j, X Nj, ), j=1,2,...35 This is oo general o be racable and, so, i is assumed ha inpus are chosen based on a muli-sage allocaion. A he firs sage, he value of each indusry oupu is allocaed o four inpu groups -- capial, labor, energy and non-energy maerials: (2) Q j f ( K E M j j j, L j E( X, E 3 j M ( X j, M, X 1 j 4 j j,... X, ); X 16 j 35 j X, X 30 j Nj ) X 31 j ) The second sage allocaes he energy and non-energy maerials groups o he individual inermediae commodiies. The componens of he energy group are Coal, Oil and Gas Exracion, Peroleum Refining, Elecric Uiliies, and Gas Uiliies. The maerials group includes all he oher 30 commodiies lised in Table 1 as well as non-compeing impors ( X Nj ). This las iem are impors ha are regarded as having no close domesic subsiues and include goods such as coffee and foreign por services. Producion is assumed o occur under consan reurns o scale and he value of indusry oupu is equal o he sum of he values of all inpus: (3) PQj Qj PKj K j PLj Lj PEj E j PMj M j P E p X p X.. p X X X X Ej j 3 3 j 7 7 j j P M p X p X p X X X X Mj j 1 1 j 2 2 j.. N Nj I is more convenien o work wih he dual cos funcion insead of he direc quaniy funcion in equaion (2) 3. The cos funcion expresses he uni oupu price as a funcion of all he inpu prices and echnology, P p( P, P, P, P, ). The form of he cos funcion is chosen as he ranslog form: Qj Kj Lj Ej Mj 3 The dual funcion is equivalen o he primal funcion; all he informaion expressed in one is recoverable from he oher. 7

8 n 1 (4) ln P ln P ln P ln P ln P f f Q 0 i i 2 ik i k i i p i 1 i, k i 1 i,k={k,l,e,m} n where he indusry j subscrip is dropped for simpliciy, and 0, i and ik are parameers ha are esimaed separaely for each indusry. The represening biases in echnical change and fp f i s are sae variables is he sae variable for he level of neural echnology. f p is referred o as he price echnology erm. These f s are unknown funcions of ime and are esimaed using he Kalman filer (see Jorgenson e al. (2004) and Jorgenson and Hui Jin (2005)). The above formulaion has a more flexible form for echnology han ha in he previous version of IGEM. In Jorgenson (1998) he cos funcion was wrien in a parameric form: (5) n n 1 1 Q 0 i i 2 2 ik i k i i i 1 i, k i 1 ln P ln p ln p ln p ln p g( ) g( ) g( ) 2 where he g() funcion was an index of he level of echnology and was assumed o have a logisic form. This new version of IGEM does no impose an explici parameric form on g(). The subsiuion erms are he same in equaions (4) and (5) and are described in deail in Jorgenson (1986). The reason for choosing he ranslog form is ha i is rich enough o allow for subsiuion among all inpus and for biases in echnical change while yielding a simple linear inpu demand equaion. Differeniaing equaion (4) wih respec o he log of inpu prices yields inpu share equaions. For example, he demand for capial is derived from he capial share equaion: PK K (6) v ln P f P Q K K Kk k K Q k In more compac vecor noaion he cos funcion and share equaion may be wrien as: (4 ) 1 ln PQ 0 α 'ln p 2 ln p ' B ln p ln p ' f f p p v (6 ) v α Bln p f ε 8

9 where p ( P, P, P, P )', v ( v, v, v, v )', f ( f, f, f, f )' and B [ ]. The p and K L E M v ε economeric esimaion. K L E M K L E M erms are sochasic variables wih mean zero ha are added for he The i s may be hough of as he average value share of inpu i in oupu value. When ik s are zero, he cos funcion reduces o he Cobb-Douglas form, and he primal K L E M oupu funcion becomes he familiar Q A K L E M. The ik s are he share elasiciies and represen he degree of subsiuabiliy among he K,L,E,M inpus. They capure he prices responsiveness of demands for inpus, e.g. how a higher price for energy leads o more demand for capial inpu. Consan reurns o scale in producion where he value shares sum o uniy and homogeneiy resricions on he cos funcion (i.e., doubling of all inpu prices doubles he oupu price) imply ha: (7) 1 i K L E M ik 0 for each k Tha he cos funcion be symmeric implies ha: (8) ik ki In order o guaranee a well defined inerior soluion for he model here is also he requiremen ha he cos funcion o be locally concave. This condiion implies ha: (9) B v v ' V, mus be non-posiive definie a each in he sample period, where marix wih he value shares along he diagonal. Turning now o he sae variables for echnology, if, for example, ik V is a diagonal upwards hen we say ha echnical change is capial-using. Alernaively, if fk is rending rending downwards hen echnical change is capial-saving. When echnical change is inpu-i using ha means ha higher relaive prices for inpu-i will slow down echnical progress. IGEM s cos funcion wih boh ik and fi fk is allows he separaion of price induced changes in inpu raios from hose ha resul from changes in echnology. 9

10 Produciviy growh ranslaes ino a fall in oupu price given inpu prices. The produciviy change beween -1 and is given by: n (10) T Pi fi fi, 1 f p f p, 1 i 1 ln ( ) ( ) The price echnology erm, f p, is non-saionary bu he difference, f p f p f p 1, is found o be saionary. The sae variables fi are saionary. To implemen he cos funcion (4) we express hese echnology sae variables as a vecor auo-regression (VAR). Le F ( f, f, f, f, f )' k l e m p denoe he enire vecor of saionary sae variables. The ransiion equaions are assumed o be governed by: (11) F ΦF 1 u where u is a random variable wih mean zero and Φ is a marix of esimaed coefficiens of he firs-order VAR. The goal in choosing he above sae space represenaion of echnology is o allow in IGEM boh a flexible represenaion of complex behavior in he sample period and a feasible bu conrolled represenaion of echnical change for he projecion period. Specifically, IGEM is a model wih infiniely lived households in consumpion and, so, requires simulaion o a seady-sae (i.e., zero-growh) soluion in all model inpus and oupus. In urn, his requires ha rends in facor biases and neural echnical change, projeced from observed hisory, ransiion o consans in seady sae. This ransiion is presumed o begin afer 25 o 30 years and is compleed wihin anoher 25 o 30 years, reflecing a conservaive approach oward a disan and very uncerain fuure Lower iers producion funcion for inermediae inpus In he subsequen sages of producion, he energy and maerial aggregaes are allocaed o he m individual commodiies. To repea equaion (2) for he second sage: (12) E E X X, X, X, X ); M M ( X,... X, X ) j ( 3 j, 4 j 16 j 30 j 31 j j 1 j 35 j Nj where he componens of he non-energy maerials (M) aggregae are every oher commodiy in Table 1 excep for he five energy commodiies. Also included in M is non-compeing impors which is a commodiy no produced by any domesic indusry. I is denoed as X N. 10

11 The demand for hese deailed commodiies by each indusry j also is derived from a ranslog cos funcion. These sub-ier cos funcions have a simpler form han equaion (4) in ha hey do no have he echnology erms. This is due o he requiremens of consisen aggregaion. To illusrae hese sub-ier funcions, he cos funcion for he energy aggregae is wrien as: 1 (13) ln P ln P ln P ln P X X X E 0 i i 2 ik i k i {3,4,16,30,31} i, k while he share equaion for he firs componen of aggregae energy (coal mining) is: X P3 X 3 X (14) v3 3 3k ln Pk, P E E k 3,4,16,30,31 Again, he ik s are share elasiciies represening he degree of subsiuion among he 5 ypes of energy, and he s are he average inpu value shares. The long lis of iems in he maerials aggregae, M(.), requires ha i oo be arranged in a muli-sage manner. The enire ier srucure for producer behavior in each indusry is given in Table 2. The M(.) aggregae consis for 5 sub-aggregaes Consrucion, Agriculural maerials, Meallic maerials, Nonmeallic maerials and Services maerials. These sub-aggregaes, in urn, are funcions of oher groups and so on unil all he m commodiies are accouned for. Each node in he ier srucure employs a cos equaion as wrien by a generalized equaion (13) Relaion beween commodiies and indusries, and oupu axes. One of he axes ha are explicily idenified in he model is producion (or sales) axes. This inroduces a wedge beween he seller and buyer prices. Denoing he buyer price of indusry oupu by (15) P QT, j ( 1 j ) PQ, j P, : QT j Each indusry makes a primary commodiy and many make secondary producs ha are he primary oupu of some oher indusry. In he make marix he M ji elemen represens he value of he ih commodiy produced by indusry j. Thus, he ih column of he make marix indicaes which indusries conribue o he ih commodiy, while he jh row shows which commodiies are made by indusry j. 11

12 The value of indusry j oupu is P QT, j Q j ; le he price, quaniy and value of commodiy i be denoed by, P, QC, VQC respecively, all from he buyer s poin of Ci i i view. For column i of he make marix, le he shares conribued by he various indusries o ha commodiy in he base year be denoed: (16) m ji M VQC ji, T i, T ; m 1 j ji For row j, le he shares of he oupu of indusry j be allocaed o he various commodiies be denoed: (17) m row ji M P Q QT, j ji, T j, T row ; m 1 i ji These shares are assumed fixed for all periods afer he base year. Equivalenly, he producion funcion of commodiies is a simple Cobb-Douglas aggregae of he oupu from he various indusries where he componen weighs are hese base year shares. Thus, he price of domesic commodiy i is given as: m1i mmi (18) P P... P Ci Q1 Qm for i=1,2,...m The values and quaniies hen are given by: (19) VQC m P Q row i ji Qj Yj j for i=1,2,...m (20) QC i VQCi P Ci 1.3. Household model To capure differences among households, he household secor is subdivided ino demographic groups including region of residence. Each household is reaed as a consuming uni, i.e. i is he uni maximizing some uiliy funcion over all commodiies in IGEM, including leisure. As currenly specified, demographic differences in IGEM are limied o he allocaion of commodiy consumpion. These differences do no ener he allocaion of ime beween work and leisure nor do hey ener he allocaion of income beween consumpion and saving. IGEM s household model hus has hree sages. A he firs 12

13 sage, lifeime income is allocaed o consumpion and saving in each period. This consumpion consiss of commodiies and leisure and is referred o as full consumpion. In he second sage, full consumpion is allocaed o oal goods and services and leisure. In he hird sage, oal goods and services are allocaed o IGEM s various energy and non-energy commodiies. This hird sage is acually a series of sages and is where he deailed demographic informaion appears Noaion F C leis L LS L KS n quaniy of full consumpion quaniy of aggregae goods consumpion quaniy of aggregae leisure quaniy of aggregae labor supply quaniy of aggregae ime endowmen quaniy of aggregae capial sock a end of period growh rae of populaion index P F, C, leis P P price of F, C and L leis price of labor o employer, economy average L P K P r hh Y hh S price of capial (renal rae), economy average rae of reurn beween -1 and household disposable income household savings Household model 1 s sage (ineremporal opimizaion) A his level, he aggregae household maximizes an addiively separable ineremporal uiliy funcion: 1 n (21) U N s 0 ln F 0 s 1 1 subjec o a lifeime budge consrain: F (22) W 0 0 s r s P F F 13

14 where F is he per capia full consumpion in period, is he economerically esimaed rae of ime preference, N 0 is he iniial populaion, and n s is he populaion F growh rae in period s. W0 is he aggregae household s full wealh a ime 0, he price of full consumpion and r s is he rae of reurn beween s-1 and s (i.e., he spo marke ineres rae). The erm full wealh refers o he presen value of fuure earnings from he supply of angible asses and labor, plus ransfers from he governmen and impuaions for he value of leisure. Tangible asses include domesic physical capial, governmen bonds and ne foreign asses. Equaions (21) and (22) are common o Cass-Koopmans ype growh models occurring in sandard macroeconomics exbooks (e.g. Barro and Sala-i-Marin 1995). Ineremporal opimaliy is expressed in a so-called Euler equaion and requires ha: F F ( 1 n )(1 r ) P 1 (23) F F P 1 1 The Euler equaion is forward-looking, so ha he curren level of full consumpion incorporaes expecaions abou all fuure prices and discoun raes. The soluion in IGEM includes his forward-looking relaionship in every period. The fuure prices and discoun raes deermined by he model ener full consumpion for earlier periods hrough he assumpion of perfec foresigh (or raional expecaions if here was uncerainy in he model). The value of full consumpion in any period is he key elemen in deriving household saving in ha period. F P is Household model 2 nd sage (goods and leisure) Once each period s full consumpion is deermined, i is subsequenly divided ino aggregae personal consumpion expendiures (commodiies) and leisure ime. The deerminaion of leisure is also he deerminaion of labor supply. Full consumpion a ime is viewed as a uiliy funcion of aggregae commodiies (C ) and leisure ( L ) a : leis (24) F F( C, L ) and he value of full consumpion is he sum of he values of goods consumpion and leisure: (25) P F P C P L F C leis leis leis 14

15 For his sage of he household model, i is assumed ha he uiliy funcion is homoheic, i.e. he income elasiciies for goods and leisure are one. The producer model used he cos dual insead of he direc producion funcion. Here again, i more convenien o use he indirec uiliy funcion, V F V ( P C, P leis, Y hh ), o derive he demand for aggregae consumpion and leisure. The ranslog form of he indirec uiliy funcion under he assumpion of homoheiciy resuls in he following consan reurns o scale cos funcion for he price of full consumpion 4 : 1 (26) ln P F ln C ln leis 2 ln i ln j c P leis P ij P P i, j { C. leis} The demand for goods consumpion and leisure is derived in a manner idenical o ha for inpu demands in he producer model (equaion 6): C P C C (27) C cc ln P cl ln P F P F leis Given he demand for leisure, he quaniy of labor supply, LS, is he exogenous ime endowmen minus leisure: (28) LS L L leis The ime endowmen groups and using wage raes as weighs. L is aggregaed from populaion daa by deailed demographic F In equaion (22) for he lifeime budge consrain, W0 represens he presen value of he sream of household full income, ha is, angible income plus he impuaion for leisure value. Household angible income is he sum of afer-ax labor income, capial income, ineres income from governmen bonds (B G ), ineres income from ne foreign asses (B * ), and ransfers from he governmen (G hh ): (29) Y (1 l) P LS (1 k) P KS i( B ) i( B ) G wp KS hh L K G * hh KS where KS is he sock of capial owned by households, K P is he renal price of aggregae capial, and l and k are ax raes on labor and capial income respecively. w is he wealh (esae) ax pu on he value of capial sock whose price is labor ax: KS P. The difference beween he price of leisure and he wage paid by employers is he 4 This indirec uiliy funcion for full consumpion is firs used in Jorgenson and Yun (1986).. 15

16 leis (30) P (1 l) P L The capial price (P K ) and ax (k) has a similar inerpreaion 5. Privae household saving hen is simply angible income less consumpion, nonax paymens o he governmen and ransfers o res-of-he-world: (31) S Y P C R H hh hh C N row Household model 3 rd sage Once he oal value of spending on commodiies is deermined in he second sage, i hen is allocaed o all IGEM s available. The allocaion of aggregae consumpion is done according o he household demand model in Jorgenson and Slesnick (1987). Households are divided ino various demographic ypes by income (expendiure) class, age, sex and race of head, family size, and ype and region of residence, and he demands for goods and services are indexed by household ypes. Toal personal consumpion is he aggregae over all he household ypes. In he producer model, he 35 inermediae inpus enered via a ier srucure wih he op ier wrien as Q=f(K,L,E,M). The household commodiy model is similarly a funcion of 35 iems, and he op ier is a funcion of five commodiy groups energy, food, non-durables, capial services, and services. Le he prices of hese groups be denoed P EN, P FD, P ND, P K, P SV, and he value of oal expendiures by household k be M k : (32) M P C P C P C P C P C k k k k k k EN EN FD FD ND ND K K SV SV The indirec uiliy funcion for household k, V ( PEN,.. PSV, M k ; A k ), is wrien in ranslog form as: Pi P P 1 i j Pi (33) lnvk i ln 2 ij ln ln Ai Ak ln M M M M i k i, j k k i k where A k is a vecor of demographic dummies and esimaed from hisorical daa. i, j { EN, FD, ND, K, SV} i, ij and Ai are parameers ha are 5 Furher feaures abou he acual ax sysem is lef ou of his descripion o avoid oo much unimporan deail. These include he propery ax, esae ax and non-ax paymens. These are, however, included in he accouns of he economy and in he acual code of he model. 16

17 In order o derive an aggregae demand funcion, resricions are imposed on he parameers as explained in Jorgenson and Slesnick (1987). Wih hese resricions he share demand equaions are derived as: (34) w B ln p Bι ln M A 1 ιb ln p k k A k where w k k k is he vecor of shares, ( P C / M,..., P C / M ), and p is he vecor of he EN EN k SV SV k 5 prices. B [ ] ij and ι is a vecor of 1 s. The aggregae demand for hese 5 commodiy groups is he sum over all households: (35) k w M k kk k 1 k k M ln M M A w [ B ln p Bι A ] M 1 ιb ln p M M k k The oal economy spending by all households is he value of consumpion from he second sage, eqs (25) and (27): (36) M M P C C k k and he aggregae share vecor is: (37) w ( P C / M,..., P C / M ) ' EN EN SV SV The demands for he five commodiy groups, CEN, CFD, CND, CK, C SV, are allocaed o he individual commodiies idenified in he model. These groups are based on he definiions in he Consumer Expendiure Surveys and reconciled wih he caegories in he Personal Consumpion Expendiures (PCE) in he Naional Accouns. These deailed caegories in he Naional PCE for 35 iems are given in Table 3 and, below, heir prices and quaniies are denoed by allocaing he five consumpion groups o hese deailed k N Pi N Ci and k N C i. The ier srucure is organized like ha for he producion funcion and is given in Table 4. There is a oal of 16 sub-ier funcions and hey are wrien in a manner idenical o he example in equaion (13) and (14) for he producion energy sub-ier, ha is, he price of energy for he household is a funcion of he prices of gasoline, fuel oil, coal, elecriciy, and gas: N N N N N (38) PEN f P6 P7 P8 P18 P19 (,,,, ) 17

18 Using hese sub-ier cos funcions yields he aggregae demands for all 35 NIPA-PCE iems { C }. N i The commodiy oupus from he producer models are classified by inpu-oupu caegories. The official benchmark IO ables from he Bureau of Economic Analysis come wih bridge ables ha link he NIPA-PCE caegories o he IO classificaion. For example, hey show how nondurable oys and spor supplies (iem 13 in Table 3) is made up of deliveries from Chemicals, Miscellaneous Manufacuring, Trade, Transporaion, ec. Using his bridge able, denoed H [ ], gives consumer demands in erms of heir IO classificaion: (39) P C H P C X N N i i ij j j j H ij 1.4. Invesmen and he cos of capial The primary facors of producion in his model are capial and labor. Capial here includes srucures, producer s equipmen, land, invenories, and consumer durables. This differs from he official invesmen in he Naional Income and Produc Accouns (NIPA) which records consumer durables as par of Personal Consumpion Expendiures 6. Capial here is assumed o be he capial owned by he privae secor. Governmen owned capial is accouned for separaely. Capial is mobile and moves coslessly from one indusry o anoher wihin any period. Invesmen goods are convered coslessly ino capial sock; here are no insallaion or adjusmen coss. These assumpions mean ha producer opimizaion reduces o minimizing he cos of producion in period (equaion 4) wihou he necessiy of considering fuure prices. Also, wih an aggregae household owning all he capial wih perfec foresigh, he saving decision is he invesmen decision 7. However, i is imporan o presen he savings-invesmen decision in a manner ha clarifies he economy s cos of capial, a key deerminan of overall growh. The owner of he sock of capial may be hough of as choosing he pah of invesmen by maximizing he sream of capial income subjec o a capial accumulaion 6 Land is in he fixed, non-reproducible asse caegory, and is no par of Invesmen in GDP (land is ransferred, no produced). The renal from land is, of course, included in he income side of GDP. 18

19 consrain. Le KS denoe he aggregae capial sock a he end of period, which is o be disinguished from he flow of capial services K j in he indusry producion funcion equaion (2). Le K P denoe he renal price of a uni of his sock, he model maximizes he discouned renal income ne of purchases of aggregae new invesmen: (40) Max 0 (1 k) P KS K I a 1 s 0 (1 r ) s P I (41) s.. KS (1 ) KS 1 I a K The afer ax capial income erm, (1 k) P KS 1, is he same as ha in he household income equaion (29), and he discoun rae r s is he same as ha in he Euler equaion (23). a I is he quaniy of aggregae invesmen and I P is is price. (Cerain ax deails in he model, such as depreciaion allowances, are no represened above so as o focus on he model s main poins.) Aggregae invesmen is acually a baske of commodiies ranging from compuers o srucures. This baske changed subsanially in he sample period. An index I of he qualiy of aggregae invesmen,, is employed o keep rack of he changing composiion. Accordingly, Eq (41) is acually wrien as: I a (42) KS (1 ) KS 1 I. This refinemen is ignored below o keep he descripion simple bu is used in he acual model. The soluion of he maximizaion problem gives he Euler equaion: (43) (1 r ) P 1 (1 k) P (1 ) P I K I There is a simple inerpreaion of his equaion. If P I 1 dollars were pu in a bank in I period -1 i would earn a gross reurn of (1 r ) P 1 a. On he oher hand, if P I 1 dollars were used o buy one uni of capial goods i would collec ren for one period, and he depreciaed capial would be worh (1 ) I P in period prices. 7 Oher ypes of growh models wih adjusmen coss of invesmen would have a disinc invesmen funcion, i.e. disinc from he household savings funcion. 19

20 The assumpion ha here are no insallaion coss means ha new invesmen goods are linearly subsiuable for old capial; ha is, he price of capial sock is equal o he price of aggregae invesmen: (44) P KS P I Equaions (40-44) say ha, in equilibrium, he price of one uni of capial sock (P KS ) is he presen value of he discouned sream of renal paymens, or capial service flows (P K ) 8. In he perfec foresigh equilibrium pah of he soluion, he capial renal prices, ineres raes and sock prices for each period are such ha equaion (43) holds. This incorporaes he forward-looking dynamics of asse pricing ino he model of ineremporal equilibrium. There is also he backward-looking asse accumulaion equaion (41). Wih equaion (44) he Euler equaion (43) can be rewrien as he well-known cos of capial equaion (Jorgenson 1963): K 1 KS (45) P [( r ) (1 )] P 1 (1 k) where ( KS KS 1 ) / KS P P P 1 is he asse inflaion rae. This renal price of aggregae capial is he endogenous price ha equaes he demand for capial by he 35 indusries and households wih he supply given by KS -1. When propery axes (axes based on he value of asses) are included he cos of capial equaion becomes: K 1 KS (45 ) P [ (( r ) (1 )) p] P 1 (1 k) The quaniy of oal invesmen demanded by he household/invesor is a I when he price is P KS P. This aggregae demand for producer durables, consumer durables I and invenories is allocaed as demand for he m individual commodiies Consrucion of new srucures, Machinery, Elecric Machinery, Insrumens, ec. by means of a simple producion funcion: a (46) I I( I1, I2,..., I m ) 8 In a model wih uncerainy, his would be saed as, he presen value of he expeced sream discouned a risk adjused raes

21 The m ypes of commodiy inpus are he same se as he commodiies demanded by he household and producers. In he same way ha demands for inermediae inpus are derived from a nesed ier of ranslog price funcions in equaions (12-14) and Table 2, invesmen commodiy demands are derived from a nesed srucure of invesmen price funcions 9. (The deails are in Appendix E of Ho (1989)). The price of aggregae invesmen is hus a funcion of he prices of commodiies: (47) P I P( P X 1, P X 2,..., P X m ) The value of oal invesmen is hus: (48) m I a X i i 1 P I P I i The value, P I, is he ih row of he Invesmen column in he use able (par of he oal X i i final demand F in Figure 2). In summary, capial formaion is he oucome of ineremporal opimizaion. Decisions oday are based on expecaions of fuure prices and raes of reurn, including he world prices of energy. Policies, announced oday, ha change fuure rules affec oday s decisions Governmen The governmen plays several imporan roles in IGEM. Governmen spending affecs welfare direcly (e.g. hrough ransfer paymens) and, indirecly, hrough public capial ha improves privae secor produciviy. Taxes inroduce wedges beween buyers and sellers and disor he allocaion of resources. IGEM does no incorporae a sophisicaed model for public goods and axaion (e.g. median voer models) bu insead reas he governmen secors in a relaively simple fashion. They are no regarded as opimizing agens. Tax raes and he overall budge defici are se exogenously as specified by curren law and officially projeced rends condiioned by i. Expendiures on individual commodiies are se as simple share funcions. 9 In he household sub-model in secion 1.3 he demand for individual commodiies is specified wih a rich consumpion funcion including demographics and esimaed wih Consumer Expendiure Survey daa. There is no corresponding heory of invesmen commodiy demand. 21

22 Following he Naional Income and Produc Accouns, general governmen purchases are disinguished from governmen enerprises. The laer are reaed as par of he business secor; i is indusry number 35. This secion considers only he purchases of finished goods and services by federal, sae and local governmens. The accouning sysem developed in Jorgenson (1980) regards he social insurance sysem as inernal o he household secor; social securiy axes are regarded as privae savings and he insurance rus funds regarded like privae asses General Governmen Revenues and Expendiures The axes ha are explicily recognized are sales axes, impor ariffs, he capial income ax, labor income axes, he propery ax, and he wealh (esae) ax. Sales axes j were defined in equaion (15), he labor ax l was used in equaion (29) and (30), and he capial income ax k was used in equaion (29) and (45). The propery ax appears in he cos of capial equaion (45), while he wealh ax is in equaion (29). Tariffs, r, are described laer in equaion (55). There is also an iem called non-ax receips ha includes various fees charged by he governmen (denoed R N ) appearing in equaion (31). The en final revenue iem is he profi or surplus from governmen enerprises ( R ). These ax formulaions are an absracion of he complex acual sysem ha includes depreciaion allowances, ax credis, alernaive minimum ax, ec. The ax raes are developed from hisorical daa in a manner ha replicaes acual revenues; hey are close o, bu no idenical wih sauory raes 10. For labor income, here is also he disincion beween marginal and average ax raes. For example, in he definiion of he price of leisure (equaion 30) he labor ax rae is he marginal rae. Governmen expendiures fall ino 4 major caegories goods and services from he privae secor, ransfers o households and foreigners, ineres paymen on deb o households and foreigners, and subsidies. The firs hree are denoed by V GG, and i( B ) i( B ). Subsidies are regarded as negaive sales axes and included in he G G* 1 1 calculaion of j in equaion (15). Transfers and ineres paymens are se exogenously, scaled o preliminary projecions of he economy and populaion and aligned wih he G hh G row 10 For example, he ax paid on labor income is par of personal income axes and follow he complex federal and sae governmen income ax rules. 22

23 official forecass from he Congressional Budge Office (CBO 2003, 2004). The oal spending on commodiies (including labor and capial) is V GG, and his is allocaed o he individual commodiies using shares from he base year: (49) P G V X G GG i i i P L V L G GG G G L P K V K G GG G G K The value, P G, is he ih row of he Governmen column in he use able in Figure 2. X i i Governmen Deficis and Debs (50) The oal revenue of he governmen is hus: Rev P Y r P M kp KS lp LS pp KS j K L KS j Y, j j i M, i i 1 1 i wp KS R R KS N en 1 Toal governmen expendiures are: (51) Exp V G G i( B ) i( B ) GG hh row G G* 1 1 In he Naional Income and Produc Accouns (NIPA) here is a disincion made beween curren expendiures and invesmen spending, and beween curren receips and capial ransfers. This resuls in a curren defici ha is disinc from ne borrowing requiremen. No such disincion is made in IGEM. Here, he public defici of he governmen is oal oulays less oal revenues, a concep similar o he official ne borrowing requiremen. Denoing he defici by (52) G Exp Rev G : The difference beween IGEM s accouning of he defici and NIPA is he reamen of he social insurance surplus. The defici in IGEM is, concepually, he NIPA borrowing requiremen plus he social insurance fund surplus. These deficis add o he public deb. Toal governmen deb is separaed ino ha held by US residens and ha held by foreigners bu in IGEM only he ne oal deb, B (53) B G G* maers. Noaionally: B B B B G G G* G G* BG 1 1 The official accouns of he sock of deb 11 unforunaely are no reconciled wih he official deficis given in NIPA. There is, herefore, a discrepancy erm, BG, in he above 11 These are given in he Flow of Funds, Asses and Liabiliies published by he Federal Reserve Bank. 23

24 equaion. The accouning in equaion (53) is in book value erms; here is also an exogenous capial gains erm ha is omied. To summarize, ax raes are se exogenously (and are no necessarily consan in he forecas period), and as is he overall defici of federal, sae and local governmen. The model generaes economic aciviy and, hence, ax revenues are endogenous. Governmen ransfers and ne ineres are se exogenously and, so, he remaining iem in equaion (51), oal general governmen spending on goods (V GG ) is deermined residually Res of he world (expors, impors and oal supply) IGEM is a naional, one-counry model, which is o say ha he supply of goods from he res of he world (ROW) is no modeled explicily for each commodiy. Similarly he demand for U.S. expors is no driven by endogenous world growh raes as is done in muli-counry models. IGEM follows he reamen ha is sandard in onecounry models, ha is, impors and domesic oupu are regarded as imperfec subsiues where he elasiciies of subsiuion are no infinie. This is ofen referred o as he Armingon assumpion and is reasonable a IGEM s level of aggregaion 12. I is also assumed ha U.S. demand is no sufficien o change world relaive prices. The oal supply of commodiy i is an aggregae of he domesic and impored varieies: (54) XS XS( QC, M, ) i i i The domesic commodiy supply is given in equaion (20), while M i denoes he quaniy of compeiive impors 13. This is o be disinguished from non-compeing impors described in Secion 1.2. The price of compeiive impors is he world price muliplied by an exchange rae (e), plus ariffs (r): (55) P (1 r ) e P * M, i i M, i 12 Tha is, while one may regard he impors of seel of a paricular ype as perfecly subsiuable, he oupu of he enire Primary Meals secor is a baske of many commodiies and would have an esimaed elasiciy ha is quie small. 13 The noaion M j denoed above he inpus of non-energy maerials ino he indusry producion funcion. The disincion here from M i as commodiy impors should be clear from he conex. 24

25 e is echnically he world relaive price and is role will be made clear afer he discussion of he curren accoun balance below. The supply funcion is similar o he producion model given in equaions (1)-(6). The demand for domesic and impored varieies is derived from a ranslog price funcion for he oal supply price: X 1 (56) ln P ln P ln P 2 ln P ln P i c C, i m M, i jk j, i k, i j, k { C, M } (57) P M P ln P XS M, i i M, i X m MM i i PC, i X (58) P XS P, QC P, M i i C i i M i i I should be noed ha here now is a closed loop in he flow of commodiies. Producers purchase inermediae inpus a price X Pi and sell oupu a price P QT,j. Prices of inermediaes, X P i, are he prices given in equaion (56), ha is, he prices of oal supply. I is assumed ha all buyers buy he same bundle of domesic and impored varieies for each ype i. Impors ino he U.S. have been rising rapidly during he sample period, no jus in absolue erms bu as a share of domesic oupu. As explained in Ho and Jorgenson (1994), his is modeled by indexing he parameer m allowing he share o rise exogenously over ime. The elasiciy and, for mos goods, is a fairly elasic parameer. in equaions (56 and 57) by ime, MM coefficien is he share As noed in Secion 1.2, one of he inpus ino he indusry producion funcions is non-compeing impors. These are goods ha do no have close U.S. subsiues, e.g. coffee. The demand for hese are derived in he nesed srucure of he producion funcion, he value of such impors by indusry j is PNC, j X Nj. The demand for U.S. expors should depend on world prices and world incomes. Since hese are no modeled endogenously, IGEM begins wih an exogenous projecion x of world incomes and demands ( X i 0 ). I is assumed ha he world price of commodiy i * * relaive o commodiy k, ( P / P ), is no affeced by U.S. marke oucomes. Wih hese C, i C, k projecions, he expor demand for commodiy i is wrien as a funcion of domesic 25

26 prices and he effecive world price ep. Normalizing unis such ha he world price is 1 * C, i yields: (59) X i x x PC, i i X i 0 e The esimaes of he expor elasiciy coefficien are also repored in Ho and Jorgenson (1994). The curren accoun balance is expors minus boh ypes of impors, plus exogenous ne ineres paymens and ransfers: (60) CA P X e P M ep X i( B ) i( B ) H G x * * * G* row row C, i i Mi i NC, j Nj 1 1 i i j This curren accoun surplus adds o he sock of ne U.S. foreign asses, which is equivalen o ne privae claims on ROW minus ne governmen deb o he ROW: (61) B B B B CA * G* * G* 1 1 The closure of he foreign secor is reaed in various ways in differen models. One may eiher se he curren accoun exogenously and le he world relaive price, e, move o align expors and impors wih i, or se e and le he CA balance be endogenous. IGEM adops he former mehod; ha is, he price of impors and expors move wih he endogenous e so ha equaion (60) is saisfied Marke balances In IGEM wih consan reurns o scale and facor mobiliy, equilibrium prices clear all markes a zero profis each period. In he commodiy markes, he demands in he economy consis of inermediae demands by producers, household consumpion, invesor demand, governmen demand and expors. The supply is given by equaion (54). In equilibrium we have, for each i,: (62) P XS P X P ( C I G ) P, X X X X x i i i ij i i i i C i i In he capial marke, he demand for capial inpu from all indusries and households equals he supply: K (63) P KS 1 P, K K j j j 26

27 Since capial is mobile across secors, here is only one price for capial renal ha is needed o clear he marke. However, in he daa, widely differen raes of reurn are observed. To reconcile his, he indusry renal price is assumed o be a fixed muliple of he economy s endogenous renal price: (64) P, P K K K j j Similarly, in he labor marke, he assumpion of mobile labor requires he indusry specific labor price o be a consan imes he economy s marke clearing price: L (65) P LS P, L ; P, L j j j P L L L j j The governmen defici (equaion 52) is saisfied by endogenous spending on goods and services, V GG, and he curren accoun surplus (equaion 60) is saisfied by endogenous changes in he world relaive price, e. The final iem is he saving and invesmen relaion: hh I a (66) S P I G CA Household saving is firs allocaed o he wo exogenous iems lending o he governmen o finance he public defici and lending o he res of he world. The remainder is allocaed o invesmen in domesic capial. As explained in earlier, in IGEM here are no separae saving and invesmen decisions; equaion (66) holds as a consequence of household ineremporal opimizaion 14. IGEM is homogenous in prices. Doubling all prices leaves he equilibrium unchanged. Therefore, any price may be chosen for he purposes of normalizaion. In IGEM, he afer-ax price of labor received by households as he seleced as he numeraire and is exogenous o model simulaions. In addiion, any one of IGEM s equaions is implied by Walras Law, ha is, if n-1 equaions hold, he n h also will hold. In he curren implemenaion of he model, he labor marke equaion (equaion 65) is dropped and is checked a soluion o see ha i indeed holds Daa underlying he model 14 In oher models where invesmen is derived separaely, e.g. due o secor specific reasons, an endogenous ineres rae will clear his S=I equaion. 27

28 The imporan daa issue relaing o he producion componen of he IGEM model is o idenify he price and quaniy daa ha correspond o he conceps laid ou in he official inpu-oupu ables and ha are consisen wih he demand componens of he model. The dollar values from he inpu-oupu ables are obviously he ones o use o characerize he nominal oupu of he indusries ( P QT, j Q j ). IGEM s principal daa source is he ime series of IO ables pu ogeher by he Bureau of Labor Saisics (BLS), Office of Occupaional Saisics and Employmen Projecions. These are consruced from he benchmark ables published every 5 years by he Bureau of Economic Analysis (BEA). This daase gives he value of oupu and inermediae inpus of all secors for These are combined wih an earlier BLS series for , and an even earlier version of an inernal IO daase (Jorgenson 1998), giving a sample period of The BLS daase also comes wih indusry prices for he enire period ha are based on heir Producer Price Indices (PPI). These are used as P,. QT j The deails of he consrucion of indusry oupu and K,L,E,M inpus are given in Jorgenson, Ho and Siroh (2003). The indusry capial sock and capial inpu are derived from he BEA s Capial Sock Sudy which includes informaion on invesmen by 60 asse caegories. The indusry labor inpu are derived from deailed demographic and wage daa in he annual Curren Populaion Survey and decennial Census. The daa for he final demand for commodiies are also made consisen wih he benchmark Inpu-Oupu ables in he BLS ime series. The consumpion daa for he hird sage is aken from he NIPA Personal Consumpion Expendiures as described in Jorgenson and Slesnick (1987). This is relaed o he IO commodiy classificaion using a bridge able like ha given in Benchmark Inpu-Oupu Accouns for he U.S. Economy 1992, Table D 15. The daa for aggregae labor supply and full consumpion is described in Jorgenson and Yun (2001) and are derived from populaion ime series cross classified by gender, age and educaion. The BLS IO series also provide he invesmen, governmen expors and impors by he IO commodiies. The invesmen daa from he BEA Capial Sock Sudy may be reconciled wih he IO classificaion via he official IO bridge able 28

29 (op. ci. Benchmark Table E). The governmen purchases are derived from he annual NIPA governmen expendiures by broad caegories (e.g. Survey of Curren Business Augus 2002, p 61, Table 3.7). The expor and impor daa are aken from he deailed Census rade daa and reconciled wih he official NIPA goods and services rade accouns (Survey of Curren Business Augus 2002, p 68, Table 4.3) 15 Survey of Curren Business, November 1997, page

30 2. Projecions of exogenous variables IGEM simulaes he fuure growh and srucure of he U.S. economy over he inermediae erm of 25 o 30 years, afer which growh is gradually slowed so as o achieve a necessary model closure by means of a zero-growh seady sae. The ime pah of model oucomes is condiional on projecions of key exogenous variables ha ulimaely sabilize o yield he seady sae resuls. Among he mos imporan of hese variables are he oal populaion, he ime endowmen of he working-aged populaion, he overall governmen defici, he curren accoun defici, labor and capial qualiy, world prices and governmen ax policies. Many of hese are developed from published sources, official and oherwise. The remaining variables are projeced from he hisorical daa ha underlie he model and is esimaion. The key variable is populaion growh and demographic change. Populaion projecions are aken from he U.S. Bureau of he Census by sex and individual year of age. 16 During he sample period he populaion is allocaed o educaional aainmen caegories using daa from he Curren Populaion Survey in a way parallel o he calculaions of labor inpu described in Jorgenson, Ho and Siroh (2003). Each adul is given 14 hours a day of ime endowmen o be used for work and leisure. This quaniy of hours for each sex-age-educaion caegory hen is weighed by labor compensaion raes and aggregaed o form he naional ime endowmen. The index used is he ranslog index and he mehodology is described in Ho (1989, Appendix C). Projecions beyond he sample period use he Census Bureau forecass by sex and age. I is assumed ha he educaional aainmen of hose aged 35 or younger will be he same as he las year of he sample period; ha is, a person who becomes 22 years old in 2020 will have he same chance of having a BA degree as a person in Those aged 55 and over carry heir educaion aainmen wih hem as hey age; ha is, he educaional disribuion of 70 year olds in 2010 is he same as ha of 60 year olds in Those beween 35 and 55 have a complex adjusmen ha is a mixure of hese wo 16 Daa may be aken from he Bureau of he Census websie, daa pre1980 in hp://eire.census.gov/ popes/archives/pre1980/popclockes.x, daa for inu.s. Populaion Esimaes by Age, Sex, Race, and Hispanic Origin: 1980 o 1999, and daa in 30

31 assumpions o allow a smooh improvemen of educaional aainmen ha is consisen wih he observed profile in The resuls of hese calculaions, shown in Figure 4, are ha populaion is expeced o grow a jus under 1.0% per year hrough 2025, reaching in excess of 460 million by In addiion, he slow improvemen of educaional aainmen means ha he ime endowmen grows only a a modesly faser rae of 1.1% hrough 2025 and maches populaion growh hereafer. The non-price-induced (i.e., he auonomous or exogenous) componen of oal facor produciviy (TFP) growh for each secor is projeced using he Kalman filer in equaion (11) above, curailed o achieve seady sae by To illusrae his procedure, Figure 5 plos resuls for seleced indusries while Figure 6 provides a hisorical perspecive for he projecions for all indusries. A negaive fp reduces oupu prices below coss while a posiive fp raises hem above coss (see equaion (4)). More imporanly, a falling fp means ha he relaive price of oupu is falling more rapidly, i.e. here is posiive TFP growh from a quaniy perspecive. As an example, in Elecric Uiliies, he sample period, , shows he fp erm firs falling, hen rising and hen falling again. Beyond 2000, IGEM s baseline projecions porray, o varying degrees, seadily improving produciviy in 30 of IGEM s 35 secors. Leading he lis in projeced TFP growh is he well known IT producer, Elecrical Machinery. There are, o be sure, several key secors wih negaive projeced produciviy growh including he large Consrucion and Services indusries. Projecing he facor biases of equaions (4) and (6) is accomplished in a manner ha is idenical o projecing auonomous TFP. Figures 7 and 8 show he resuls for Elecric Uiliies and Elecrical Machinery, respecively. Beyond 2000, Elecric Uiliies are projeced o be energy-saving. Iniially, hey are projeced o be capial- and laborusing and maerials-saving bu his reverses oward he end of he curren decade. The high echnology Elecrical Machinery indusry is projeced o coninue o be capial-using and labor-, energy- and maerials-saving. eire.census.gov/popes/daa/naional/ables/inercensal/inercensal.php. These populaion daa are revised o mach he laes censuses (e.g daa is revised o be consisen wih he 1990 Census). 31

32 Two oher imporan assumpions ha deermine he shape of he economy are he governmen and rade deficis. To achieve a seady-sae condiion, he levels of governmen and res-of-world indebedness mus sabilize o some invarian level in he fuure. This requires ha he governmen budge and curren accoun deficis rend ulimaely o zero balances. The curren base case assumpions are ploed in Figure 9. The governmen defici follows he forecass of he Congressional Budge Office (CBO 2003) for he nex 10 years and hen is se o rack o a zero balance by The curren accoun defici is presumed o shrink seadily so ha i reaches a zero balance by These simplifying assumpions allow he simulaion a smooh ransiion pah o seady sae which permis easier compuaion along he way. These deficis are deerminans of long run growh o he exen of heir influence on base case capial formaion bu are subsanially less imporan han he demographic and produciviy drivers. 32

33 3. Emissions projecions and abaemen opporuniies in IGEM 3.1. Inroducion The Iner-emporal General Equilibrium Model (IGEM) is equipped wih a number of array-based exernaliy variables ha are concepually and empirically defined o sui he needs of a paricular analysis. For example, in one configuraion, here are four variables aiding in he assessmen of he benefis and coss of climae change and climae change miigaion policies. These are: 1. Carbon emissions arising from fossil fuel use in millions of meric ons, carbon dioxide equivalen (MMTCO 2 E); 2. Fossil fuel use in physical unis, quadrillion Bu; 3. An IGEM consruc of oal GHG emissions less hose arising from agriculure and from he residenial and commercial secors; 4. A composie of oal GHG in MMTCO 2 E covering all gases arising from all sources. Exernaliies in IGEM are considered as join oupus or producs of he economic aciviies represened wihin is srucure. These may be process relaed in ha hey arise from he creaion and manufacure of a paricular good or service or hey may be produc relaed in ha hey arise from he economy s use of a paricular good or service. In eiher case, he annual level of each composie exernaliy is joinly deermined by he producion and consumpion aciviies ha give rise o i and, in urn, hese aciviies are associaed wih he processes and producs of domesic indusries and wih corresponding U.S. impors Emissions projecions The developmen of IGEM s exernaliy coefficiens for energy and he environmen is derived from deailed hisorical daa appearing in EPA s 2004 Invenory of U.S. Greenhouse Gas Emissions and Sinks, and EIA s Monhly Energy Review. These series are sored and aggregaed (see Table 5) o creae he energy and 33

34 emissions oals corresponding o he four exernaliy variables defined above. The oals hen are expressed relaive o he underlying secor-specific economic oupus ha give rise o hem. I is worh noing ha none of he exernaliy coefficiens is rendless over he period which furher highlighs he difficulies in projecing hem (see Figure 10). In developing baseline projecions, here are four iner-relaed issues. These are: 1. Wha weigh should be aached o each emission facor when dealing wih such aggregaed secors? 2. How should emissions coefficiens change over ime o reflec composiional changes wihin a secor? 3. To wha exen should hisorical or anicipaed miigaion be sripped from or preserved in coefficien rends? 4. To wha degree are exernaliy oucomes o be calibraed eiher o hisorical daa or o official projecions? Ideally, and daa permiing, analyses should be conduced for each gas and each economic aciviy; ha is, rend firs and hen aggregae. This solves he problems of weighing and composiional changes and ges he baseline righ. Invariably, however, ime and daa are unaffordable luxuries. More ofen han no, aggregaion occurs prior o rending. The biases ha his inroduces in baseline emissions pahs can be overcome, however, hrough developmen and use of alernaive base cases ha are direcionally appropriae o hese biases. Decisions on rends in miigaion are condiional on he objecives and circumsances of he paricular analysis o which he model is being applied. Changes in emissions inensiies are boh marke and policy driven. The exen o which policy driven miigaion is o be lef in or sripped from he emissions coefficiens depends on wheher he paricular policy is par of he curren assessmen. If i is independen hen he effecs of miigaion should remain; however, if he analysis is rerospecive in naure and a porion of he observed miigaion is policy dependen hen i should be parsed from he emissions coefficiens. The process of isolaing he marke and policy causes of 34

35 changes in emissions inensiies is obviously much easier he more disaggregaed are he daa used in heir consrucion. Calibraion is also a maer ha depends on he paricular analysis; i is generally more imporan in comparaive assessmens han i is in hose in which a model analysis sands alone. Maching or racking emissions levels, be hey hisorical or projeced, requires eiher calibraing he variables ha drive emissions (and) or adjusing he join producion of emissions per uni of economic aciviy. In he curren base case, he deails of energy use (coal, oil, gas and elecriciy) in IGEM are consisen wih hisorical daa and, generally, wih he projecions from EIA s 2005 Annual Energy Oulook (AEO). Emissions are calibraed o mach he 2000 levels represened in EPA's 2004 emissions invenory. The emissions coefficiens for fossil fuels (coal, oil and gas) are held emporally fixed while a common rend, dampening o achieve seady sae, is adoped for hose coefficiens aached o all oher economic aciviies (e.g., agriculure, chemicals, meal manufacuring, elecriciy ransmission and disribuion, ec.). For he fuure, in developing baseline emissions pahs, each of he underlying relaionships beween emissions oucomes and heir driving forces meris more independen analysis and evaluaive scruiny. Wih is diversiy of deail, IGEM hen could reflec more fully he payoffs from boom-up invesigaions of emissions sources Endogenizing exogenous abaemen opporuniies Were he emissions inensiies of oupu unresponsive o marke or policy driven changes and were all marke and echnological possibiliies fully represened wihin a model s srucure, here would be no need for addiional work. Marginal abaemen cos schedules derived from model simulaions would accuraely characerize he economic coss associaed wih all of he subsiuions and all of he marke and echnological changes ha follow from he implemenaion of a paricular miigaion sraegy. Bu emissions inensiies are no unresponsive o marke circumsances or policy iniiaives, and a given model may no fully represen all of he marke and echnical opporuniies ha may serve fuure miigaion. To he exen ha abaemen possibiliies, above and beyond hose implici in a given model, and heir associaed coss can be idenified, here 35

36 naurally emerges he quesion of inegraion. IGEM employs he following process in endogenizing hese exernal abaemen opporuniies. 1. For each GHG and each economic aciviy, hose miigaion possibiliies are idenified ha are likely o be adequaely represened in IGEM s response o a given policy iniiaive. These are considered o be inernal o IGEM as are he economic coss associaed wih heir implemenaion. All oher possibiliies are exernal o IGEM and require exernal abaemen cos schedules. Currenly, all foreseeable abaemen opporuniies relaed o carbon emissions are viewed as inernal; ha is, marginal abaemen cos schedules derived from IGEM simulaions accuraely porray all he economic coss of heir inermediae-erm miigaion. Exernal o IGEM are hose abaemen opporuniies relaed o residenial and commercial miigaion sraegies, non-co 2 greenhouse gases, inernaional greenhouse gas permi rading, and domesic sequesraion (see Table 6 and Figure 11). 2. IGEM is simulaed o ascerain is response o he paricular miigaion policy. This generaes an iniial marginal abaemen cos (MAC) schedule ha serves as he saring poin of an ieraive process. Typically, his sep involves imposing an emissions consrain and observing is corresponding pah of permi prices or inroducing a pah of permi prices and observing is corresponding abaemen. 3. The marginal abaemen cos schedule from sep wo (or sep six below) is summed horizonally wih hose cos schedules exernal o IGEM o creae an aggregae marginal abaemen cos schedule. 4. The argeed or required level of abaemen hen is read from his schedule and he allocaion of abaemen o each of he exernal and inernal caegories is deermined. Because some abaemen is being provided from sources exernal o IGEM, he consrain in IGEM is relaxed or, equivalenly, permi prices are reduced. 5. Having deermined he abaemen benefis from exernal sources, i is also necessary o calculae and inroduce heir economic coss. These are deermined by inegraing he areas underneah he exernal MAC schedules in accordance 36

37 wih heir allocaed amouns of abaemen and inroducing hese coss direcly ino IGEM. Inernaional permi rading is reaed as a facor paymen (e.g., ren on a angible asse or income on a financial asse) and is presumed o subsiue for a porion of he curren accoun defici ha arises from rade and, accordingly, affecs he overall saving-invesmen balance. The coss associaed wih domesic sequesraion are assumed o be borne enirely by IGEM s agriculure, foresry and fisheries secor. All oher coss are allocaed o emissions generaing aciviies in proporion o heir conribuions o baseline GHG emissions. In addiion, all coss save hose associaed wih inernaional permi rading are inroduced as facor-neural, or unbiased, changes in inpu-ooupu relaionships. 6. IGEM hen is re-simulaed wih less inernal abaemen (or lower permi prices) arising from more exernal abaemen purchased wih he now endogenized, addiional inpu requiremens implici in he exernal abaemen cos schedules. This yields a new schedule of IGEM marginal abaemen coss. 7. Seps hree hrough six are repeaed unil IGEM s (inernal) marginal abaemen cos schedule no longer changes from one ieraion o anoher; experience has shown his o be anywhere from one o six ieraions of he aforemenioned. The procedure oulined above, hough differen mechanically, is idenical in spiri and oucome o ha implemened in he Emissions Predicion and Policy Analysis (EPPA) Model of MIT s Join Program on he Science and Policy of Climae Change (Hyman, e al., 2002). The ieraive process adoped here sacrifices he compuaional efficiency of he MIT approach o gain fuller use of he informaional conen porrayed in he exernal MAC schedules, mos specifically, he areas of no regres, heir precise curvaures and he poins a which hey become inelasic. Beyond hese differences, boh approaches succeed in offering quie reasonable ways o endogenize hose marke and echnological abaemen opporuniies (and heir coss) ha are idenified as lying ouside he boundaries of he possibiliies inheren in a model s responses. 37

38 4. A base case simulaion IGEM s baseline pah for he economy evolves hrough four phases. The near erm, e.g., , represens a coninuaion of recen rends and condiions. The inermediae erm, e.g., , reflecs he onse of rends o eliminae he naion s budge and rade deficis. The long erm, e.g., , involves a sysemaic ransiion of all variables o heir final-sage, zero-growh, seady-sae levels. Facor biases and auonomous produciviy rends sabilize. Budge and rade deficis vanish. Tax raes and foreign commodiy prices become invarian. Throughou he firs hree of hese phases, here is a gradual slowing in he raes of populaion and labor force expansion and in he exernal forces governing produciviy and facor subsiuion. In he case of he laer, here are sill he ineracions of hese wih IGEM s emerging paerns of relaive prices and so he forces of price-induced echnical change are sill a work. Beyond 2060, he remaining wo of IGEM s driving variables, populaion and he labor force, sabilize and he economy ceases o grow. This seady-sae condiion of zero growh is no a predicion; raher, i is an assumpion of necessiy for he model s soluion. The rends above in heir hisorical conex are eviden in he daa on aggregae spending and inpus o producion shown in Table 7. Growh in real GDP and personal consumpion is iniially in he 2.5 o 3.5% range bu averages less han 1.0% over he inerval from 2025 o Growh in capial inpu, arising from gross invesmen ne of depreciaion (capial consumpion), and he availabiliy of labor follow similar paerns of declining growh over ime. A subsanial decline in labor growh is more immediae as populaion growh slows and households demand more leisure. Subsequenly, a slowdown in capial growh occurs as budge and rade deficis are narrowed and households mainain heir spending behavior. Finally, aggregae produciviy shows a modes decline o one-half of one percen, , bu averages only 0.1% per annum, The produciviy rend reflecs he combined influences of priceinduced echnical change and he auonomous produciviy projecions described in he Secion 2. 38

39 Secoral rends on oal facor produciviy (TFP) are displayed in Figures 12 (simulaed) and 13 (hisorical). For he near and inermediae erms, TFP growh raes appear as exensions of heir long-run hisories. Wihin he conex of an overall slowing, produciviy growh in U.S. agriculure and high echnology manufacuring coninues o lead and flourish while ha in services, publishing, moor vehicles and consrucion coninues o lag and languish. Growh in he oal oupu of he U.S. economy, including all inermediae goods and services as well as value added and all final spending (GDP), averages around 2.0% over he period The projeced composiion, porrayed in Figures 14 and 15, again evolves as an exension of hisoric marke behavior (Figure 16). High echnology manufacuring and he financial secor coninue o enjoy relaively more rapid growh while he mining, meals, energy and agriculural secors coninue o grow less rapidly. Domesic moor vehicle manufacuring and consrucion are also among he relaively slower growing indusries. Of paricular relevance o his analysis are he emerging paerns of energy use and greenhouse gas emissions. Figure 15 provides evidence of he changing mix of energy inpus. All of he energy secors experience slower han average raes of growh over he period Domesic oil and gas exracion and coal producion are he slowes growing, naural gas and elecric uiliy oupus are he fases growing and growh in peroleum refinery oupu lies in beween. As shown in Table 8, aggregae fossil fuel use racks he overall economy bu a a slower rae. The carbon emissions from fossil fuel use grow iniially a an even slower rae reflecing he changing relaive mix of energy inpus oward oil and gas and away from coal. Beyond 2010, his change in relaive imporance has largely occurred and he carbon emissions associaed wih fossil fuel use grow in line wih he corresponding physical quaniy. As discussed in Secion 4, he (physical) energy and emissions coefficiens for fossil fuels (coal, oil and gas) are consan over ime while a common and declining rend is adoped for he emissions coefficiens aached o all oher economic aciviies (e.g., agriculure, chemicals, meal manufacuring, elecriciy ransmission and disribuion, ec.). Thus, in hese laer cases, here are degrees of auonomous change refleced in he base case emissions projecions. This is evidenced in he projecions of greenhouse 39

40 gases presened in Table 8. Greenhouse gas emissions grow more slowly han fossil fuel use and he emissions from same because of he srucural changes in he mix of economic aciviies and because of he represenaion of observed behavior in he form of auonomous efficiency improvemens. Projeced energy- and emissions-efficiency improvemens coninue well ino he fuure bu a raes ha are somewha slower han hisorically observed (Table 9). The annual reducion in he energy-inensiy of real GDP averages 1.0%, , wih emissions efficiency improvemens averaging 1.2% for he carbon from fossil fuel use and 1.4% for oal greenhouse gases. The annual raes of energy- and emissionsefficiency improvemen diminish as he economy heads oward seady sae, averaging 0.2%, I should be noed ha hese diminishing raes of efficiency improvemen also are consisen wih he broader rends of recen hisory (Table 9). 40

41 References Barro, Rober J. and Xavier Sala-i-Marin (1995) Economic Growh McGraw-Hill. Bureau of Economic Analysis (BEA), The Survey of Curren Business, U.S. Dep. of Commerce, Washingon DC, Seleced Issues. Congressional Budge Office (CBO), Curren Budge Projecions, The Congressional Budge Office, Washingon DC, Seleced Releases. Congressional Budge Office (CBO) (2003), The Long-erm Budge Oulook, The Congressional Budge Office, Washingon DC, December. Energy Informaion Adminisraion (EIA) (2004) Annual Energy Oulook 2004, DOE- EIA-0383, U.S. Dep. of Energy, Washingon DC, January. Ho, Mun S. (1989) "The Effecs of Exernal Linkages on U.S. Economic Growh: A Dynamic General Equilibrium Analysis," Ph.D. hesis, Harvard Universiy. Ho, Mun S. and Jorgenson, Dale W (1994) Trade Policies and U.S. Economic Growh, Journal of Policy Modeling, 16(22): Hyman, R.C., J.M. Reilly, M.H. Babiker, A. DeMasin and H.D. Jacoby (2002), Modeling Non-CO2 Greenhouse Gas Abaemen, MIT Join Program on he Science and Policy of Climae Change, Repor No. 94, December. Jorgenson, Dale W (1963) Capial Theory and Invesmen Behavior, American Economic Review, 53(2), p , May. (1980) Accouning for Capial, in George M. von Fursenberg (ed.), Capial, Efficiency and Growh, p , Cambridge, MA Ballinger. (1986) "Economeric Mehods for Modeling Producer Behavior," in Handbook of Economerics, eds. Z. Griliches and M. Inriligaor, Elsevier Science, vol. 3, (1998) Growh Volume 2: Energy, he Environmen, and Economic Growh, Cambridge, The MIT Press. Jorgenson, Dale W., Richard J. Goele, Peer J. Wilcoxen and Mun S. Ho (2000). The role of subsiuion in undersanding he coss of climae change policy, Pew Cener on Global Climae Change, Sepember. Jorgenson, Dale W. and Hui Jin (2005), Sae-space Modeling of Endogenous Innovaion in he U.S. Economy, Working paper, Harvard Universiy. 41

42 Jorgenson, Dale W., Mun S. Ho, Hui Jin and Jon D. Samuels (2004), "U.S. Producion Technology a he Indusry level: Technical Change and Subsiuion among deailed inpus," Repor II o Midwes Research Insiue, Naional Renewable Energy Laboraory Division, Washingon DC. Jorgenson, Dale W., Mun S. Ho and Kevin J Siroh (2003), "Energy Efficiency, Informaion Technology, and he Sources of Growh across U.S. Indusries," Repor I o Midwes Research Insiue, Naional Renewable Energy Laboraory Division, Washingon DC. Jorgenson, Dale W., and Daniel T. Slesnick (1987), "Aggregae Consumer Behavior and Household Equivalence Scales," Journal of Business and Economic Saisics, 5(2), Jorgenson, Dale W., and Daniel T. Slesnick (2005), Consumpion and Household Labor Supply, Working paper, Harvard Universiy. Jorgenson, Dale W., and Peer J. Wilcoxen (1993), "Reducing US carbon dioxide emissions: as assessmen of alernaive insrumens," Journal of Policy Modeling, 15 (5-6), Jorgenson, Dale W., and Kun-Young Yun (2001), Lifing he Burden: Tax Reform, he Cos of Capial, and U.S. Economic Growh, Cambridge, The MIT Press. Savins, R.N. and K.R. Richards (2005), The Cos of U.S. Fores-Based Carbon Sequesraion, Pew Cener on Global Climae Change, January. U.S. Environmenal Proecion Agency (EPA) (2004), Invenory of U.S. Greenhouse Gas Emissions and Sinks: , EPA 430-R , U.S. Environmenal Proecion Agency, Washingon DC, April. 42

43 Figure 1: Flow of goods and facors in IGEM Labor Household Demographic Projecions Indusry Producers Capial Personal Consumpion Savings Inermediaes Invesmen MAKE marix Capial nex period Gov Purchases Domesic commodiies Impors Expors Commodiy supply Commodiy Demand 43

44 j i X ij Fi QC i NC K j L j T j Q j Q j : indusry j oupu QC i : quaniy of domesic commodiy i K: capial inpu L: labor inpu T: sales ax NC: noncompeing impors X ij : quaniy of inermediae inpu i ino j F i : final demand for commodiy i (C+I+G+X-M) M ji : quaniy of commodiy i made by indusry j Figure 2: Inpu-oupu USE able. 44

45 i j M ji Q j QC i Figure 3: Inpu-oupu MAKE able. 45

46 Table 1: IGEM's Indusry and Commodiy Deail Secor Descripion 1 Agriculure, foresry, fisheries 2 Meal mining 3 Coal mining 4 Crude oil and gas exracion 5 Non-meallic mineral mining 6 Consrucion 7 Food and kindred producs 8 Tobacco manufacures 9 Texile mill producs 10 Apparel and oher exile producs 11 Lumber and wood producs 12 Furniure and fixures 13 Paper and allied producs 14 Prining and publishing 15 Chemicals and allied producs 16 Peroleum refining 17 Rubber and plasic producs 18 Leaher and leaher producs 19 Sone, clay and glass producs 20 Primary meals 21 Fabricaed meal producs 22 Non-elecrical machinery 23 Elecrical machinery 24 Moor vehicles 25 Oher ransporaion equipmen 26 Insrumens 27 Miscellaneous manufacuring 28 Transporaion and warehousing 29 Communicaions 30 Elecric uiliies (services) 31 Gas uiliies (services) 32 Wholesale and reail rade 33 Finance, insurance and real esae 34 Personal and business services 35 Governmen enerprises

47 Table 2. Tier srucure of indusry producion funcion. Symbol Name Componens 1 Q Gross oupu capial, labor, energy, maerials Q=f(K,L,E,M) 2 E Energy coal mining, peroleum & gas mining, peroleum refining, elecric uilies, gas uiliies E=f(X3,X4,X16,X30,X31) 3 M Maerials Consrucion, Agriculure Ma, Meallic Ma, (nonenergy) Nonmeallic Ma, Services Ma M=f(X6,MA,MM,MN,MS) 4 MA Agriculure Agriculure, Food manuf, Tobacco, Texile-apparel, Wood-paper maerials MA=f(X1,X7,X8,TA,WP) 5 MM Meallic Fab-oher meals, Machinery ma, Equipmen Maerials MM=f(FM,MC,EQ) 6 MN Nonmeallic Nonmeal mining, Chemicals, Rubber, Sone, Misc manuf Maerials MN=f(X5,X15,X17,X19,X27) 7 MS Services Transporaion, Trade, FIRE, Services, OS Maerials MS=f(X28,X32,X33,X34,OS) 8 TA Texile-apparel Texiles, Apparel, Leaher TA=f(X9,X10,X18) 9 WP Wood-paper Lumber-wood, Furniure, Paper, Prining WP=f(X11,X12,X13,X14) 10 OS Oher services Communicaions, Gov. enerprises, NC impors OS=f(X29,X35,X_N) 11 FM Fab-oher Meals Meal mining, Primary meals, Fabricaed meals FM=f(X2,X20,X21) 12 MC Machinery Ind. Machinery, Elecric Machinery maerials MC=f(X22,X23) 13 EQ Equipmen Moor vehicles, Oher ransp equip, Insrumens EQ=f(X24,X25,X26)

48 Table 3. Commodiies classified by NIPA Personal Consumpion Expendiures IGEM classes NIPA PCE classes 1 Food Food purchased for off-premise consumpion 2 Meals Purchased Meals and Beverages 3 Meals-Employees Food furnished employees incl. farms 4 Shoes Shoes 5 Clohing Clohing and accesories excep shoes; Clohing miliary 6 Gasoline Gasoline and Oil 7 Coal Fuel Oil and Coal 8 Fuel Fuel Oil and Coal 9 Tobacco Tobacco producs 10 Cleaning Cleaning and misc. household supplies and paper 11 Furnishings Semi-durable house furnishings 12 Drugs Drug preparaions and sundries 13 Toys Nondurable oys and spor supplies 14 Saionery Saionery and wriing supplies 15 Impors Expendiures abroad by US residens 16 Reading Magazines, newspapers; Flowers and poed plans 17 Renal Tenan-occupied nonfarm; Farm dwellings; Housing-oher 18 Elecriciy Elecriciy 19 Gas Gas 20 Waer Waer and saniary services 21 Communicaions Telephone and Telegraph 22 Labor Domesic service 23 Oher household Household Operaion- Oher 24 Own ransporaion User-operaed ransporaion services 25 Transporaion Purchased local ransporaion; Inerciy ransporion 26 Medical Services Physicians; Deniss; Oher professional; Hospials & homes 27 Healh Insurance Healh Insurance 28 Personal services Cleaning, sorage, repair; Cohing-Oher; Barbershops ec. 29 Financial services Brokerage; Bank service; Services wihou paymen; Expense of life insurance and pension plans 30 Oher services Legal services, Funeral & burial, Personal business-oher 31 Recreaion Repair; Admissions o specaor amusemens; Clubs; Commercial paricipan amusemens; pari-muuel; Recreaion-oher 32 Educaion Ins. Educaion and research; Religious and welfare aciviies 33 Foreign Travel Foreign Travel by US residens 34 Owner mainenance Impuaions for mainenance of owner occupied housing 35 Durables Impued renal value from all durable classes: Jewelry and waches; Furniure;... Video and audio goods Noe: NIPA-PCE classes are hose given in he Naional Accouns in he annual Survey of Curren Business, e.g. (SCB Augus 2001, Table 2.4).

49 Table 4. Tier srucure of consumpion funcion. Symbol Name 1 V Consumpion Componens Energy, Food, Nondurables, Capial, Services group V=f(EN,FD,ND,K,SV) 2 EN Energy Gasoline, Fuel Coal, Elecriciy, Gas EN=f(C6,FC,C18,C19) 3 FD Food Food, Meals, Meals-employees, Tobacco FD=f(C1,C2,C3,C9) 4 ND Nondurables Clohing-shoe, Household Nondurables, Drugs, Nondurable misc ND=f(CS,HHN,C12,NDM) 5 K Capial services Capial service flow from household capial K=f(C35) 6 SV Services Housing-enan, Household services, Transporaion, Medical Services-misc 7 FC Fuel Coal Coal, Fuel Oil SV=f(HS, HHS, TR, MD, SVM) FC=f(C7,C8) 8 CS Cohing Shoe Clohing, Shoes CS=f(C4,C5) 9 HHN Household Cleaning, Furnishings Nondurables HHN=f(C10,C11) 10 NDM Nondurables Toys, Saionery, Impors, Reading miscellaneous NDM=f(C13,C14,C15,C16) 11 HS Housing enan Renal, Owner mainainence Services HS=f(C17,C34) 12 HHS Household Waer, Communicaions, Labor, Oher household services HHS=f(C20,C21,C22,C23) 13 TR Transporaion Own ransporaion, ransporaion TR=f(C24,C25) 14 MD Medical Medical services, Healh Insurance MD=f(C26,C27) 15 SVM Services Personal services, Business services, Recreaion, Educaion ins. miscellaneous SVM=f(C28,BS,RR,C32) 16 BS Business Financial services, Oher services Services BS=f(C29,C30) 17 RR Recreaion Recreaion, Foreign Travel RR=f(C31,C33)

50 Table 5. Greenhouse Gas Emissions - By Gas, Aciviy and Secor MMTCO2E MMTCE IGEM Secor CO2 Coal Residenial Commercial Indusrial Elecriciy Generaion U.S. Terriories Naural Gas Residenial Commercial Indusrial Transporaion Elecriciy Generaion U.S. Terriories Peroleum Residenial Commercial Indusrial Transporaion Elecriciy Generaion U.S. Terriories Ammonia Producion and Urea Applicaion Soda Ash Manufacure and Consumpion Tianium Dioxide Producion Phosphoric Acid Producion Carbon Dioxide Consumpion Cemen Manufacure Lime Manufacure Limesone and Dolomie Use Iron and Seel Producion Aluminum Producion Ferroalloys Geohermal* Naural Gas Flaring Wase Combusion

51 CH4 Eneric Fermenaion Manure Managemen Saionary Sources - Wood residenial Rice Culivaion Agriculural Residue Burning Coal Mining Abandoned Coal Mines Perochemical Producion Peroleum Sysems Mobile Sources Iron and Seel Producion Naural Gas Sysems Landfills Wasewaer Treamen N2O Agriculural Soil Managemen Manure Managemen Field Burning of Agriculural Residues Saionary Sources - Coal Niric Acid Adipic Acid N2O Produc Usage Mobile Sources Saionary Sources - Peroleum Saionary Sources - Naural Gas Human Sewage Wase Combusion HFCs PFCs and SF6 Subsiuion of Ozone Depleing Subsances HCFC-22 Producion Magnesium Producion and Processing Aluminum Producion Semiconducor Manufacure Elecrical Transmission and Disribuion Toal GHG Non-covered GHG Residenial and Commercial Agriculural Covered GHG Covered as Percenage of Toal GHG 83.6% 84.5% 83.6% 84.5% MMTCO2E - Millions of meric ons, carbon dioxide equivalen MMTCE - Millions of meric ons, carbon equivalen

52 Table 6. Marginal Abaemen Cos Schedules Cos in 2000 dollars per meric on, carbon dioxide equivalen Abaemen in millions of meric ons, carbon dioxide equivalen (MMTCO2E) Covered and unlimied Non-covered and limied Inernal o IGEM Exernal o IGEM Non-covered InernaionalSavins-Richard Toal Cos IGEM Non-CO2 GHGHH & Small Bus Trading SequesraionLimied Offses Toal -$ $ $ $ $ $ $ $ $ $ $ $

53 Table 7. Characerisics of Base Case Growh - The Economy Average Annual Growh Raes in Percen Hisorical Simulaed Demand Side GDP 3.42% 2.65% 1.60% 0.77% Household Spending 3.60% 3.52% 1.53% 0.69% Supply Side Value Added 3.39% 2.47% 1.38% 0.71% Capial Inpu 4.03% 3.72% 1.23% 0.40% Labor Inpu 1.87% 0.85% 0.68% 0.68% Produciviy 0.62% 0.50% 0.48% 0.14%

54 Table 8. Characerisics of Base Case Growh - Energy and Emissions Average Annual Growh Raes in Percen Hisorical Projeced Fossil Fuel Use 1.60% 1.65% 1.14% 0.56% GHG Excl. Agriculure, Residenial & Commercial 1.51% 1.24% 1.01% 0.55% GHG - Toal 1.40% 1.23% 0.96% 0.54% Carbon from Fossil Fuel Use 1.66% 1.50% 1.08% 0.55%

55 Table 9. Characerisics of Base Case Growh - Energy and Emissions Inensiies Average Annual Growh Raes in Percen Hisorical Projeced Fossil Fuel Use -1.62% -1.00% -0.46% -0.21% GHG Excl. Agriculure, Residenial & Commercial -1.71% -1.41% -0.59% -0.22% GHG - Toal -1.82% -1.43% -0.64% -0.24% Carbon from Fossil Fuel Use -1.56% -1.15% -0.52% -0.22% Trends in energy and emissions per uni real GDP

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