What are the key structural features and external assumptions that drive models and produce different results?
• Substitution by Firms and Consumers – The U.S. economy is particular is extremely flexible, with firms and consumers being adept at trading off inputs and consumption due to changes in prices. How an economy adapts to available substitutes and/or finds new methods of production under a GHG constraint will be critical in minimizing overall costs of reducing emissions. – An important component of the substitution process is the flexibility of capital investments. How capital investments can be adjusted or retrofitted to take into account changing prices of fuels or raw materials will impact how various sectors can respond to emission constraints in the shorter term. This is often discussed in terms of “putty and clay” investments. – Business objectives. Most models assume that firms only optimize on strict conditions of product output and profit maximization. However, a range of other drivers including market share, corporate responsibility and other long term strategies may impact the
