Methods for including income distribution in global CGE models for long-term climate change research

The consequences of climate policy and the impacts of climate change vary among different types of households depending on their income level, expenditure pattern, and other socioeconomic characteristics. Global economy-environment models that are used to assess climate change issues traditionally do not distinguish households by income or other attributes. To facilitate progress in this area, we review and assess literature on methods to include household heterogeneity in global long-term Computable General Equilibrium (CGE) models. We distinguish among three categories of approaches: 1) the explicit modeling of multiple household types within the CGE framework, 2) micro-simulation modeling, and 3) direct modeling of income distribution. For each of these approaches we describe the method, key assumptions, limitations and several prominent examples from the literature. Moreover, we discuss data needs, including the contents of household survey data, their availability and processing. We conclude with an overview of what each method could provide for global, long-term climate-related research.