The road ahead for energy-economy policy models: Integrating market dynamics, expectations and welfare costs

Energy-economy models have emerged to provide policy makers with information on the effect of their policies. These models are used to forecast the responses of businesses and consumers, and the costs of these responses may be estimated using a cost accounting method. In this paper, I suggest three improvements that can be made to energy-economy models and cost accounting techniques. First, I outline a method of simulating the obsolescence of technologies when they become uncompetitive. Second, I develop a method to simulate the behaviour of businesses and consumers when they have expectations of their future emissions costs. Finally, I develop a method of cost accounting that can estimate the social costs caused by policies, and that can estimate the costs caused by regulations.