15 - Bottom-up modeling of energy and greenhouse gas emissions: approaches, results, and challenges to inclusion of end-use technologies

Summary

Introduction

Two general approaches have been used for the integrated assessment of energy demand and supply – the so-called “bottom-up” and “top-down” approaches. The bottom-up approach focuses on individual technologies for delivering energy services, such as household durable goods and industrial process technologies. For such technologies, the approach attempts to estimate the costs and benefits associated with investments in alternative fuels and technologies, and increased energy efficiency, often in the context of reductions in greenhouse gas (GHG) emission or other environmental impacts. The top-down method assumes a general equilibrium or macroeconomic perspective, wherein costs are defined in terms of changes in economic output, income, or GDP, typically from the imposition of energy or emissions taxes.

A fundamental difference between the two approaches is in the perspective each typically takes on consumer and firm behavior, and the performance of markets for energy efficiency. The bottom-up approach typically assumes that various market factors (“barriers”) prevent consumers from taking actions that would be in their private self-interest, that is, would result in the provision of energy services at lower cost. These market barriers include lack of information about energy efficiency opportunities, lack of access to capital to finance energy efficiency investment, and misplaced incentives which separate responsibilities for making capital investments and paying operating costs. In contrast, the top-down approach typically assumes that consumers and firms correctly perceive, and act in, their private self-interest (are utility and profit maximizers), and that unregulated markets serve to deliver optimal investments in energy efficiency as a function of prevailing prices.