Thomas S. Fiddaman, Ph.D.
Ventana Systems, Inc.
More than 20 energy-economy models have been developed to address different climate policy questions. While these integrated models are quite varied, most draw heavily on the energy-economy models of the 70s and 80s, which were motivated by energy security issues and explored the potential impacts of increasing energy prices on economic growth. They typically employ exogenous rates of technological improvement and backstop energy prices. Factor allocation is optimal. The impact of a carbon tax on the energy system at a given time can often be reduced to an instantaneous tradeoff between abatement costs and emissions.
System dynamics models of energy-economy interactions focus instead on disequilibrium dynamics and feedback complexity, with behavioral decision rules and explicit stocks and flows of capital, labor, and money. This research uses elements of earlier system dynamics work to create a new model, FREE , that tests the implications of feedback processes that have not been explored in the climate change context. Among these are endogenous technological change and boundedly rational decision making. Energy requirements are embodied in capital, and energy production capacity depends on explicit capital stocks. The search for optimal policies is decoupled from other decisions, and uses intertemporally fair criteria.
Experiments with the model indicate that depletion of oil and gas resources has critical interactions with climate policy. The inclusion of learning-by-doing and other path-dependent mechanisms suggests that abatement efforts will be more effective and should be more stringent than models with exogenous technology forecasts indicate. Inclusion of delays and biases from structural and behavioral features of the energy system reveals higher long-run emissions reduction potential but imposes substantial constraints that prevent rapid reductions. Fair discounting and consideration of intangible damages substantially raise the indicated abatement effort.
The full article may be downloaded in Adobe Acrobat format: FidFREE.pdf (200 k).