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FINDING SUSTAINABLE PATHWAYS

OUR PROCESS

Our process helps Canada achieve sustainable development solutions that integrate environmental and economic considerations to ensure the lasting prosperity and well-being of our nation.

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We rigorously research and conduct high quality analysis on issues of sustainable development. Our thinking is original and thought provoking.

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Parallel Paths – 7.3 Overview of the GEEM Model

For this report, we applied a new version of the GEEM model, NA-GEEM (North America General Equilibrium Emissions Model).

GEEM is a static computable general equilibrium (CGE) model. Designed to capture the Canadian regional economies as a whole as well as the U.S. economy, it integrates consumer demand, labour and capital supply, and the markets for all key inputs and outputs. NA-GEEM is different from previous GEEM versions in that it explicitly represents both Canada and the United States. Representing this complex system comes at the cost of simplifying assumptions. These assumptions are discussed below.

NA-GEEM treats commodities differently based on whether their prices are set regionally, in North American markets, or in world markets. The U.S. and Canada are assumed to be price takers for crude oil, natural gas prices are set at a North American level, electricity prices are set at the provincial/regional level, and all other goods’ prices are set at the national or provincial level as appropriate.

NA-GEEM assumes that all markets clear; that is, prices adjust until supply equals demand. Most markets are assumed to be perfectly competitive, such that producers never make excess profits. However, an exception is made for the upstream oil and gas sectors, which are assumed to earn extra profits due to resource rents, which are shared among the producers and provinces. The presence of resource rents makes the oil and gas sector less susceptible to declines in output than other sectors, as the size of rents can decline while the sector remains profitable. However, output from the oil and gas sector may still decline as a function of costs from the sector (i.e., an increase in costs will remove marginal plants from production), and this relationship is based on 2009 data from the National Energy Board.

The version of GEEM we used in this report models the available North American investment capital as a fixed quantity. Capital investment can move between different North American sectors or regions in response to a policy, but there are no net inflows or outflows, and overall level of investment remains constant. As such, NA-GEEM does not explicitly model the accumulation and depreciation of capital, so it cannot model incentives for more or less total investment. The upshot of the model’s capital investment assumption is that capital that otherwise would have been invested in energy or GHGintense industries moves to less GHG-intense industries, such as services and other manufacturing. Significant capital also migrates into the electricity sector, as it converts from fossil-fuel to less fossil-fuel-intense generation technologies, and the economy as a whole switches to electricity from fossil fuels.

Our analysis may overestimate the degree to which capital will migrate from the GHGintense sectors to the less-GHG intense sectors instead of internationally, and the degree to which North American overall world savings are transformed into investment capital in an environment where climate policy is applied, but a review of the capital literature shows that capital is not yet perfectly liquid (i.e., it does not move across borders and between regions with perfect ease in search of higher returns), and that savings (the source of investment capital) created in North America will preferentially remain in North America or any other source region.

Like most CGE models, NA-GEEM makes use of production functions to depict technology and production, which assume a smooth substitution between all inputs at a given rate. In certain industries, such as services, there does seem to be a relatively smooth substitution between capital, labour, energy, and materials. In other industries, such as electricity production or the iron and steel industry, substitution is not as smooth since fundamentally different technologies can produce the final product. This phenomenon is not confined to industry; natural gas furnaces or electric resistance heaters can both be used to heat buildings, but have completely different capital and operating costs, energy use, and emissions profiles. Bottom-up models – including the model that evolved into the CIMS model, which the NRTEE has used in past work – were designed to explore these issues. To better align GEEM to CIMS with available time and resources, we used a method borrowed from the MIT-EPPA model74 and altered the production functions for the crude oil, natural gas, and electricity sectors to allow them to employ discrete technologies to reduce emissions.

GEEM is a static model in that it models policies and outcomes only in 2020 and does not explicitly represent the pathways from 2005 to 2020. Static CGE models, though a credible and tested tool for macroeconomic analysis, are significantly less complex than dynamic CGE models. This simpler approach was necessary in this case given the complexity of other aspects of the model under the general equilibrium framework, including accounting for multiple regions within Canada and the flows of trade and permits between Canada and the U.S.

GEEM is calibrated to the 2005 structure of the U.S. and Canadian economies, the most recent dates for which data is available.75 This calibration creates a base structure from which the model adjusts under different scenarios. If the chosen year is unrepresentative or if economic or technology structure changes quickly between now and 2020, the outputs of the model may be biased. However, using known economic structures grounds the model in the real world, and policy outcomes are then representative of the current economic structures.

While GEEM does not model non-energy related sources of emissions such as forestry and agriculture, it does model landfill gas emissions. This is a necessary limitation of our approach as non-energy sources of emissions are very different from other sources of emissions. However, over 80 % of emissions in Canada are energy-related. Given that current U.S. policy proposals, such as the Waxman-Markey bill, rely extensively on domestic land-use offsets, and that Canada could achieve real emissions reductions from these sectors, we qualitatively assess this issue in the report.


[74] McFarland et al. (2004); Sue Wing (2008).
[75] Calibrated CGE models operate from a single year input-output matrix, where all inputs and outputs are balanced. Estimated CGE modes operate using parameters estimated from historical time series.