CGE Modeling for Regulatory Analysis
The EPA conducts benefit-cost analysis (BCA) for all economically significant (those with costs and/or benefits of at least $100 million in a single year) or particularly novel rulemakings to inform the policy. These analyses quantify the expected social benefits and costs of alternative regulatory options relative to a baseline that represents conditions expected to occur absent the regulation. In addition, the EPA often evaluates how the costs and benefits of regulation are distributed across households, sectors, and regions.
An important element in the set of tools needed for evaluating benefits, costs, and economic impacts are computable general equilibrium (CGE) models, which provide aggregated representations of the entire economy in equilibrium in the baseline and under a regulatory or policy scenario. They are designed to capture substitution possibilities between production, consumption and trade; interactions between economic sectors; and interactions between a policy shock and pre-existing distortions, such as taxes. Unlike many other modeling tools at the EPA’s disposal, CGE models provide insights into the effects of regulation that occur outside of the directly-regulated sector.
In 2015, the EPA formed a Science Advisory Board (SAB) panel to explore the use of general equilibrium approaches, and more specifically computable general equilibrium models, to prospectively evaluate the costs, benefits, and economic impacts of environmental regulation. The SAB issued its final report in 2017 and affirmed the value of CGE models to capture important interactions between markets when there are both significant cross-price effects and distortions in those markets, as a complement to the detailed analysis that the EPA typically conducts for its rulemakings.
In response to the SAB recommendations, the EPA’s National Center for Environmental Economics was tasked with developing the Agency’s economy-wide modeling capabilities for regulatory analysis. One of the first steps in building capacity has been the development of a new CGE model called SAGE (a recursive acronym for SAGE is an Applied General Equilibrium model).
The SAGE CGE Model
SAGE is a CGE model of the United States economy developed to aid in the analysis of environmental regulations and policies. It is an intertemporal model, resolved at the sub-national level. Each of the regions in the model has five households reflective of national income quintiles and 23 representative firms, most of which are focused on the manufacturing and energy sectors that are often impacted by environmental policies. SAGE builds on the advice of the SAB’s 2017 report, best practices in the economics literature, and the EPA's Guidelines for Preparing Economic Analyses (2010).
SAGE version 2.0.0(44 MB, December 23, 2020) (zipfile)
The model is solved using the General Algebraic Modeling System (GAMS) Exitand the PATH solver. The model’s build stream, a set of programs used to construct the required data inputs needed to solve SAGE, is partially written in both R Exitand GAMS. A portion of the needed data inputs are based on state-level IMPLAN Exitsocial accounting data. Due to the proprietary nature of this data set, the model’s social accounting matrix is not included in the publicly available version of SAGE. The data set for model may be built following the instructions in the documentation with a licensed version of IMPLAN.
EPA's Science Advisory Board completed a peer review (PDF, 34 pp.) of the SAGE model in August 2020. Version 2.0 of the SAGE model incorporates improvements in response to the SAB recommendations, including updates to address those recommendations the SAB advised the EPA to incorporate before using the model in regulatory analysis (denoted as Tier 1 recommendations). These include improving the calibration of government expenditures and deficits and the foreign trade deficit; allowing for more flexibility in the consumer demand system; and representing the United States as a large open economy. Several of the SAB's medium- and long-run recommendations have also been incorporated into the model. The EPA is in the process of reviewing the other medium- and long-run recommendations made by the SAB.
Prior versions of the SAGE model and its documentation are available here.
Recent NCEE working papers using the SAGE model
|The Importance of Source-Side Effects for the Incidence of Single Sector Technology Mandates and Vintage Differentiated Regulation||Alex L. Marten|
|Exploring the General Equilibrium Costs of Sector-Specific Environmental Regulations||Alex L. Marten, Richard Garbaccio and Ann Wolverton|
|An Applied General Equilibrium Model for the Analysis of Environmental Policy: SAGE v1.0 Technical Documentation||Alex L. Marten and Richard Garbaccio|