MSG-TECH: Analysis and documentation of a general equilibrium model with endogenous climate technology adaptations

Abstract

To meet the global challenge of climate change, shifts in industrial structures and consumption patterns will have to be accompanied by technological adaptations. Analytical tools for projecting effects of ambitious climate policies cannot be based on historical data and current technology characteristics, alone, but need to represent technological innovations that have not yet emerged. This is the background for the development of the hybrid model MSG-TECH, which builds on the computable general equilibrium (CGE) model MSG6, but resembles energy system models in its inclusion of anticipated future technological options. The information on technological options is collected from bottom-up calculations and is exploited to model a wider range of possibilities in the optimisation by households, firms, and public institutions than in traditional CGE models. The significance of the modelling innovations is illustrated by introducinga uniform carbon price to achieve the same climate policy target – a cut of 10 million tons CO2 equivalents by 2020 - in the MSG-TECH model and the original MSG6 model, respectively. When technological adaptations are accounted for, over one half of the necessary reductions take place by choosing other technological solutions. When these options are left out, marginal abatement costs more than triple and welfare costs more than quadruple, and the cost increase for the traditional manufacturing industries is particularly severe.The intuition is that a model that fails to account for a large part of the expected future abatement alternatives reflects an unrealistically inflexible and inefficient economy. The corresponding characteristic would apply to traditional bottom-up models that include technological abatement, but fail to account for reduced economic activity and new industrial patterns.