Evaluating Economy-wide Effects of Power Sector Regulations Using the SAGE Model

We develop a novel methodology for linking a detailed industry model, such as the Integrated Planning Model (IPM) of the electricity sector, with the U.S. Environmental Protection Agency’s computable general equilibrium model, SAGE, to estimate the economy-wide social costs and distributional impacts of an environmental regulation when an iterative linkage between models is not possible. We demonstrate the linking approach using stylized compliance costs that are consistent with the types of model outputs typically available from a technology-rich industry model to calibrate an identical equilibrium response in a corresponding partial equilibrium sub-model of SAGE. The calibrated parameters are then passed to the full version of SAGE to estimate general equilibrium impacts. This methodology allows us to translate partial equilibrium impacts into economy-wide impacts while retaining consistency in underlying compliance behavior. The linked framework provides a means of calculating indirect sectoral impacts, aggregate welfare impacts, and distributional outcomes that capture both income and expenditure effects for heterogeneous households. In our stylized example, we find that aggregate social costs are greater than calibrated engineering costs of compliance by approximately 21% and assumed sector-specific partial equilibrium costs by 29%. We also discuss data challenges of operationalizing this methodology in a real-world setting.