Will using newer input–output data for general equilibrium modeling provide a better estimate for the CO2 mitigation cost?

Wei-Hong Hong, Hui-Chih Chai, Y.-H. Henry Chen, John Reilly and Sergey Paltsev

Economic Systems Research, 2021, vol. 33, issue 2, 157-170

Abstract: We provide a critical evaluation about how updating the input–output data of a computable generation equilibrium model can affect policy results, an assessment that is rarely done in existing literature. Specifically, we explore how datasets with different fossil energy cost shares alter results of policy simulations that aim at reducing CO2 emissions. We prove analytically that a sudden fossil fuel price surge, which provides little time for adjustment through input substitution, can lead to a higher CO2 mitigation cost. The finding is demonstrated empirically in a full-scale economy-wide model for a base year with lower fossil fuel prices, contrasted with results from a base year when fossil fuel prices spiked. We then propose an adjustment to resolve the issues of using input–output data that embed abrupt fossil fuel price hikes.

Date: 2021
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DOI: 10.1080/09535314.2020.1784098

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