Modeling assignments

Building models can only be learned via doing it. This is why we provide an assignment in which we ask you to build your own environmental or energy economic model.

You can choose from two types of assignments: An assignment to build a theoretical model and an assignment to build a numerical model. In both cases, you will go through similar steps, but the main focus of the assignments will differ. In the theoretical assignment, most work will be spent on developing a model that is simple enough to be solved but complex enough to capture the essence of the problem at hand and to yield interesting insights. In the numerical assignment, you will likely develop a simpler model but will have to calibrate it with data and run it to get quantitative insights.

You can already start developing your model from now on. However, you will get most of the essential information for the development of your model during the next weeks. Developing a model is a process and we would like you to use some time (maximum 2h/week) during the next weeks for the design of your own model.

We have Case Study Groups that are also working on either theoretical or numerical models. As we cannot provide individual support for each participant, we will discuss the models of these Case Study Groups (Week 4 and Week 7) in order to give you detailed examples of how to design and interpret your model.

Theoretical assignment

In many applications of environmental policy, there is considerable market power. The regulated firms may have power on their product market, their customers may have market power, or the firms that supply clean technologies to the production sector may have market power. But if there is market power, we have to account for this when setting up an environmental policy. The question is how should a given policy instrument be designed in such a case.

We ask you to consider either a case where the customers of a firm have market power or where there is market power in the industry that supplies clean technologies. Furthermore, we ask you to pick either an emissions tax or permit trading as an instrument of environmental policy.

Please develop a model that describes your problem (chosen type of market power problem combined with the chosen policy instrument) and use this model to analyse how the policy should be designed (which level of emissions tax or how many permits should be granted).

Thereby, you should use the following steps:

1. Describe your problem in words and explain your intuition how market power influences firm behaviour and how this needs to be taken into account when setting up the policy.
2. What is necessary to describe your problem and what is a good modeling structure? Which actors are necessary and what are the decision variables that these actors need to have? Which markets do you have to model? (You can already do this by now).
3. Set up a simple model that includes these points. Explain why your model is a credible description of the problem. (You can already do this by now).
4. Solve the model and derive insights for the design of the environmental policy. In particular, compare the case with to the case without market power. (You will get the necessary information for doing this step in Week 6).
5. Interpret your results: What is driving those results and are they plausible? (This is also covered in Week 6).
6. Finally, build a story (that is, a convincing line of argument) around your model work: Explain the problem, how it is captured by the model, the model results, and what we learn from them for the design of environmental policy. (Again, wait until Week 6) In Week 4, we will discuss points 1–3. In Week 7, we will discuss points 4–6.

Numerical assignment

Many countries in the world are aiming to transform their energy systems. For example, the current EU strategy strives for a transition to a competitive, secure and sustainable energy system by 2050 with an 80% emission reduction. For the electricity sector this basically requires a complete emission free supply in 2050. Is this realistic? What challenges would such a system impose? And what will we need to change now to achieve the desired transition?

In the numerical assignment, we ask you to analyse a possible future of the European electricity market. There are two options to do this: You can either focus on the functionality of different future system configurations, e.g. a 100% renewable setup or a mix of renewables, storage and demand side management, by developing a future market model. Or, you can focus on the impact of specific instruments or price assumptions, e.g. renewable support mechanisms or increasing emission prices, on the transition process from our current system towards a future system by developing an investment model.

Please develop a model formulation that fits your chosen research focus and identify and gather the data you need to run your numerical simulations. We will provide you with a stylized dataset (demand, supply, and transmission capacities) of the current electricity system as starting point. (See below this article for a PDF with explanations.)

Thereby, you should use the following steps:

1. Use the stylized dataset to develop a simple model of the current European electricity system to get more familiar with model formulation, numerical modeling and the electricity system. (You can already do this by now).
2. What are the questions you want to answer with your model? Decide what type of simulation you will need to develop in order to answer your question: a detailed scenario analysis of your future market or an investment model to analyse the transition? What will your model need to account for (time/spatial resolution, actor behaviour, policy framework etc.)? (You will get the necessary information in Week 3).
3. Identify what type of model you want to design (optimization or equilibrium?). How will you include the necessary market, policy and technical constraints? (You will get the necessary information in Week 3).
4. Identify your endogenous variables and exogenous parameters. Gather the needed data and run the model. (This will be covered in Week 5).
5. Interpret your results: Which insights can be derived from your simulations? What numbers are the most important? How can you visualize the findings? (Also wait until Week 5).
6. Connect the dots: Link your question with the chosen model design and your findings. What can we learn from your future forecast for our current energy debate? (Again, wait until Week 5). In Week 4, we will discuss points 1–3. In Week 7, we will discuss points 4–6.

You can profit a lot from developing your own model. However, note at that point, that you do not have to take part in the assignment during this course.