Economic Modeling/Policy Analysis

When assessing a public policy option, a government, trade or development organization needs to consider the effect on the regional, state and national economy.

Using its economic modeling capabilities, KPMG can measure the net economic benefits of economic/social/environment/industry policies and contributions of a business, organization, industry, or event to the regional, state or national economy.

The KPMG approach

KPMG has developed a comprehensive economy wide modeling system, referred to as a Computable General Equilibrium (CGE) model, which represents an economic structure in terms of economic activities between agents, including housholds, firms, and governments along with underlying price/cost relationships for products, labor and capital markets. The modeling outputs include:

industry/sectoral outputs, value added and employment;

key macroeconomic variables such as gross output, employment, consumption, investment, exports and imports;

Methodology

A CGE model is a large scale system of equations used to capture detailed commodity and industry demand and supply transactions. Prices, wages, capital rental rates, exchange rates play explicit roles in determining optimal levels of transactions along with economy-wide resource and borrowing constraints.

Broadly speaking, CGE models are applied to three areas:

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• industry/project impact analysis: contributions of anorganisation and an industry to the economy and/oreconomy-wide impacts of an investment project, an event,a public and private infrasatructure project, and a naturaldisaster or social disruption.

• macro and industry scenario development & forecasting:what if macroeconomic scenario analysis, what if industryand company risk scenario analysis, and industry activityforecasting.

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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 381822

Economic & Valuation Services

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prices, wages, cost trends, and industry rates of return;

tax revenues by type and employment by occupation.

Application Areas

CGE models can be used to address a wide range of economic and policy issues. Any industry/commodity related economic shocks and risks can be assessed in terms of the economy-wide flow-through impacts. Any economy-wide shocks originating from other countries or government macro policies can be evaluated in terms of detailed industry/commodity impacts.

policy analysis: tax policy development and assessments of reform options, regional economy/industry development policies, trade policies including tariff and non-tariff policies, fiscal policies, R&D policies, migration and labor market policies, regulatory reform, and emissions policies.

Our commitment

We can help you analyze proposed policies using a comprehensive CGE modeling framework and its underlying input-output data bases. Our team of PhD-level economists and econometricians can provide the economic modeling and analytical framework to meet your objectives.

A key underlying database for the CGE model is the Input-Output (IO) table or a social accounting matrix (SAM). Other key data include detailed direct and indirect tax information, employment and occupation by industry, current and capital accounts statistics and government fiscal statistics.

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Below is an example of some CGE modeling outputs, illustrative of a recent tax policy analysis we have performed.

Contact us

Jon D. Silverman, PhD

Principal

Tysons Corner T: 703-286-8283 E: jdsilverman@kpmg.com

Sang-Hee Han, PhD Senior Manager Tysons Corner T: 703-962-5692E: sangheehan1@kpmg.com

kpmg.comSome or all of the services described herein may not be permissible for KPMG audit clients and their affilates.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. NDPPS 381822

For more information on how EVS can help you with Economic Modeling/Policy Analysis, contact your local KPMG advisor or:

Applications of CGE Models

CGE models have been used to assess a wide range of economic and policy impact analyses such as tax reform, regulatory reform, trade policy, technology innovation, education and productivity, government revenue and expenditure, industry development, minimum wage policy and immigration, environmental and energy policy and infrastructure impacts. Some selected areas are discussed below.

Environmental Policy Analysis

CGE models can be applied to the following environmental issues:

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• Climate Changes and Natural Disaster Economic Impacts Analysis: based on a climate change scenario and a potential natural disaster, economy-wide impacts can be assessed. These modeling results can be used to understand the economic costs of a no-action option or a risk analysis for a specific industry.

• Efficient Water Usage and Water Pollution ReductionPolicy: often, water use is subsidised at a significant levelor social external costs of water use is not fully reflected inwater prices that industry users face. Comprehensiveeconomic impacts of a water trading policy, a water pricingpolicy or a water supply policy can be assessed using aCGE modeling tool.

ECONOMIC & VALUATION SERVICES

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 381822

Economic & Valuation Services

Emissions Reduction Policy Analysis: often an emissions reduction policy is a package of different sectoral target sub-policies or a uniform emissions trading or emissions tax plan. The overall emissions and economy-wide impacts of these various alternative options can be assessed using a CGE modeling analysis.

KPMG CGE modeling has the capability of including an energy and gas emission accounting module. The module accounts for the energy and gas intensity per unit of industry output for each industry and region included in the model. The electricity generation sector allows for inter-fuel substitution behavior in response to emissions capping or emissions charges. The model can specify mechanisms that allow for the endogenous take-up of abatement measures in response to greenhouse gas policy measures.

Energy Sector Policy Analysis

KPMG CGE modeling has the capacity to incorporate a new energy production technology, including renewable energy sources into the existing energy supply and demand structure, and gas emission accounting module.

Potential energy sector modeling issues include:

Economic implications of a new energy production technology: to assess potential supply and demand impacts of a new energy technology, a CGE modeling framework can be used to explicitly specify price sensitive inter-fuel substitution possibilities.

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Economic impacts of energy price and energy supply shocks: KPMG CGE models explicitly differentiate energy usage by its supply sources, i.e., domestic and imported sources. Therefore, any energy price impacts can be evaluated in terms of energy using industries, household consumption, investment and international trade through their flow-through price impacts on other commodites.

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• Energy demand and energy price forecating/projections: A CGEmodel specifies energy demand and its price structure fordetailed industry and final users. Using a dynamic modelingframework, the CGE model has the capacity to project energydemand and prices under a future energy production technologyand energy related policy scenario.

Industry Risk Analysis

A CGE modeling framework interfaced with a macro-econometric model can assist in firm level risk analysis, usingthe CGE modeling results for industry-level rate of returns.

The potential industry risk related issues include:

Multi-layer scenario development for stress testing: often,various components for a stress testing scenario are not mutuallyconsistent with each other as they are not generated from asingle integrated modeling frameowork. However, a CGE modelcan generate all the key components of a scenario analysis in aninternally consistent manner.

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• Risk analysis of the firm's value: KPMG CGE models explicitlymodel industry level rates of return, which are modeled based onmicroeconomic optimisation of an investment decision. The CGEmodeling results can be fed into a CAPM framework to assessthe uncertainty of the valuation analysis.

• Industry forecasting for firm's internal operational models: usingits dynamic mode, the CGE models can generate industry/commodity level forecasts along with other labor and capitalmarket variables. Such forecasting can be used for a firm'sinternal finance and budgeting analysis.

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