A forward looking version of the MIT Emissions Prediction and Policy Analysis (EPPA) model
This paper documents a forward looking multi-regional general equilibrium model developed from the latest version of the recursive-dynamic MIT Emissions Prediction and Policy Analysis (EPPA) model.
The most important new feature of the forward-looking dynamic version of the EPPA model is the perfect foresight behavior, represented by full inter-temporal optimization. It means agents are able to anticipate future changes when making consumption, savings, and investment decisions.
The forward-looking feature of the model makes it possible to better address economic and policy issues such as borrowing and banking of greenhouse gas (GHG) allowances, efficiency implications of environmental tax recycling, endogenous depletion of fossil resources, international capital flows, and optimal emissions abatement paths among others. It was designed with the flexibility to represent different aggregations of countries and regions, different horizon lengths, as well as the ability to accommodate different assumptions about the economy, in terms of economic growth, foreign trade closure, labor leisure choice, taxes on primary factors, vintaging of capital and data calibration.
The forward-looking dynamic model provides a complementary tool for policy analyses, to assess the robustness of results from the recursive EPPA model, and to illustrate important differences in results that are driven by the perfect foresight behavior. We present some applications of the model that include the reference case and its comparison with the recursive EPPA version, as well as some greenhouse gas mitigation cases where we explore economic impacts with and without inter-temporal trade of permits.