CGE Modeling for Regulatory Analysis
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, 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 EPA’s disposal, CGE models provide insights into the effects of regulation that occur outside of the directly-regulated sector.
In 2015, 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 EPA-authored white papers and memos that informed this SAB process. 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 EPA typically conducts for its rulemakings.
In response to the SAB recommendations, 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 EPA's Guidelines for Preparing Economic Analyses (3rd Edition).
- SAGE Model Documentation version 2.1.1
- SAGE version 2.1.1 (zip) (Feb. 20, 2024)
The model is solved using the General Algebraic Modeling System (GAMS) and 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 and GAMS. A portion of the needed data inputs are based on state-level IMPLAN social accounting data. While the underlying IMPLAN data are proprietary, EPA is able to provide the social accounting matrix based on these data in the publicly available version of SAGE. The data set for the model may also be built anew by following the instructions in the model documentation along with a licensed version of IMPLAN.
EPA's Science Advisory Board completed a peer review of the SAGE model in August 2020. Version 2.0.1 of the SAGE model incorporates improvements in response to the SAB recommendations, including updates to address those recommendations the SAB advised EPA to incorporate before using the model in regulatory analysis (denoted as Tier 1 recommendations). Subsequent model versions also retain these improvements. 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. EPA is in the process of reviewing the other medium- and long-run recommendations made by the SAB. View EPA’s response to the SAB recommendations.
View prior versions of the SAGE model and its documentation.