Final report on marginal abatement cost curves for the evaluation of the market stability reserve

Computable general equilibrium (CGE) models are wide-spread tools for policy evaluation in the national and international context. They typically feature a detailed representation of productive industries and can track the impacts of price based policies or scarcity of production factors across the economy. Calibrated to benchmark equilibria given in form of social accounting matrices (SAMs), they represent both production and the consumer basket as nested constant elasticity of substitution (CES) functions. Positive elasticities of substitution in the production functions give industries (or representative households) the possibility to react to price changes by increasing demand of cheaper inputs and demanding less of the more expensive goods for the production of any unit of output (or utility). Production sectors adjust their activity levels such that they make zero economic profit, and representative consumers spend on consumption such that their income balances expenditures (which thus include saving). Market balance conditions for each commodity in the model set the prices such that demand and supply at those prices clear.