Economic Analyses and Models

Understanding Economic Analyses and Models

Many tools and resources are available to help states assess the net effect of the potential costs and benefits of mitigation options. Economic analyses can be done using screening–level approaches or using sophisticated modeling tools depending upon the level of rigor desired or resources available.

Ultimately, modeling results are determined by the quality of the model and the assumptions used to generate the results. While models can provide useful insights into how one or more policies are likely to affect a state's economy, models can be applied very differently to analyses of the same policy and can create conflicting or confusing results at first glance. It is important for states to understand the limitations of the available tools and the assumptions used to generate each scenario, so they can objectively manage or review the analyses.

For example:

• Models try to be representative of the real world but do not fully capture all of the details and dynamics that exist in the complex economic system.
• Different types of economic models or approaches – each designed for different inputs and with different strengths and weaknesses – can be useful for answering different types of questions.
• Uncertainties are inherent in model formulations, model data, and many of the assumptions and inputs made in modeling that will affect the results.

Recognizing their limitations, economic models are useful in enabling policy–makers to explore how the complex economic system is likely to respond to climate change mitigation options and to ensure that the potential impacts are consistent with the overall state goals and priorities. More details are available on assessing the economic benefits of clean energy initiatives in Chapter 5 of Assessing the Multiple Benefits of Clean Energy: A Resource for States.

Sample questions for states to consider when planning an economic analysis of mitigation options:

• What method of analysis is appropriate? For example:
  • Is it sufficient to conduct basic screening analyses or does it require more sophisticated dynamic modeling, perhaps for regulatory purposes? Or both?
  • Within the methods, which types of models are appropriate?
• Is the purpose of the study retrospective (an historical assessment) or prospective (forward–looking)? Is it long-term or short-term?
• What financial and staff resources are available to conduct the model? To analyze the model results?
• What are the specific assumptions about the baseline scenario and what data exists and/or is needed to model the scenario?
• Who needs to contribute to and/or review the analysis and/or assumptions?

Sample questions for states to consider when reviewing an economic analysis of mitigation options:

• Does the analysis include both the costs and benefits of taking a particular course of action?
• What type of model or approach was used? For example:
  • Was it a rule-of-thumb estimate or a sophisticated modeling exercise?
  • Was the model dynamic or static?
  • How rich is the energy or other sector representation (i.e. how many fuel options or technologies does it include)?
  • Is the data in the model state-specific?
  • Does the model treat policies as a one-time shock to the economy or does it allows agents in the model to anticipate future policies and change behavior accordingly?
• Were the assumptions reasonable and objective? For example:
  • How were the costs and benefits determined?
  • How or do prices change over time?
  • Does the analysis include the opportunity cost of the investment?
  • How was autonomous technological change represented in the model?