Modelling can be structured into four main phases:

1. First, we have to understand our problem.

What question do we want to answer? Do we want to analyse an argument or a real world setting? What economic mechanisms may be important in our answer? What kind of results do we expect our model to yield?

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2. Second, we have to build the model.

To this end, we have to transfer our problem into a formal structure by combining different model parts, so-called ‘building blocks’. We have to decide what has to be included in our model and how to include it. Furthermore, we have to be able to show that our model is a credible description of the problem at hand.

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3. Third, we need to solve our model.

We have to use our model equations to get results that answer our questions. We have to find necessary data if we want to evaluate a real world setting. Furthermore, we have to check whether our results are robust.

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4. Finally, we have to interpret the results and use the insights gained in the model to make an argument.

In particular, we have to discuss why and to what extent our results can be transferred to reality and what implications they might have. Thus we embed our model in a ‘story’.

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It is important to note that in most cases, we cannot simply go through these phases step-by-step. Rather, we usually have to go back and forth until we have found the right model that yields interesting results that help us to answer our questions.

Most importantly, we will often iterate between phase 1 and 2 and between phase 2 and 3. The first iteration is useful, because by modelling a situation, we get to know it better and thus might want to adjust our original question or include new promising economic mechanisms. The second iteration is necessary, because not all models can be solved. We often have to make our first modelling attempts simpler to get a solution or we have to make them more complex to get a solution that is actually interesting.

Course structure

This course is mostly structured with the above pathway of building a model in the back. In the first chapter, we have already discussed what economic models are and what we have to consider when building models so that our models are indeed useful. In the next steps of this chapter we will have a very first look at the basics of modelling.

In the second chapter, we will continue to familiarise ourselves with basic modelling concepts using a system perspective. This will cover phase 1 and 2 and introduce a simple toolbox to integrate numerous technical details into your models.

In the third chapter, we will extend our modelling knowledge by moving towards the company perspective and introduce the necessary building blocks for designing and understanding models for answering questions from environmental and energy economics. Thus we will again cover the first two phases but also have a closer look at the solution phase.

In the fourth chapter, we will explain how our models need to be adjusted to account for the complexities of real world markets by leaving our theoretic first-best world. Here phase 3 will become a crucial and often limiting element of our model design.

Finally, we will use the last chapter of the course to put those model elements together and have a look at possible energy futures and discuss your and our visions. And we will return to the four modelling phases by adding the last phase to our cycle and learning how to check model results for robustness and how to embed them in a storyline.

In all chapters you will have the chance to explore the different modelling steps with simple interactive exercises that explain the needed model elements and already help you to explore different aspects of energy systems and environmental policy tools. You can access these interactive exercises and modelling simulations via a link. The exercises will then open in a new window. To be able to keep your solutions, you should take a screenshot of each of them.

Additional learning resources

During this course, you will benefit strongly from participating in the model exercises and by reading some papers that use environmental or energy economic models.

Literature

For environmental economic modelling work, a good starting point is to look at the papers and the working papers listed under this topic in RePEc. Papers that can be accessed free of charge have a green download symbol. Look for interesting titles and then see whether the paper uses a formal model. In addition, you might look at the work of some environmental economists that use models similar to the ones taught in this course, such as Michael Hoel, Martin Weitzman, Carolyn Fischer, Scott Taylor or Till Requate. Again, a green download symbol shows papers that you can directly access.

For numerical modelling in energy economics, a good starting point is the respective working paper series on RePEc, with the possibility to subscribe in order to get a monthly update, or the subject matter listings on SSRN: Politics & Energy eJournal and Renewable Energy eJournal. Those working papers are free access publications. Naturally, not all of those publications will include models.

If you want to get more familiar with different energy models you can also visit the wiki of the openmod initiative. They provide an overview on different models that are at least partly accessible. Furthermore, they also provide information on how to obtain energy data. Similarly, the Simulation Lab of the Swiss Competence Center for Research in Energy, Society and Transition provides an overview on the different energy models used for socio-economic energy research in Switzerland.

Software

Finally, we would like to mention that you might benefit from using scientific software for exploring your model knowledge and building your very own models. Theoretical models can be done just using pen and paper, but using tools such as Mathematica or Maple might reduce the time spent on calculations (if you already have some experience with these software packages). For designing numerical models, you could use scientific software, such as GAMS or Matlab. However, often spreadsheet software (like Excel) is sufficient and the model development will also only require pen and paper.

For most scientific software packages, test or student versions are offered at no or strongly reduced costs, so it might be useful to have a look at these tools.

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