Comparing applied general equilibrium and econometric estimates of the effect of an environmental policy shock

Abstract

We compare the employment effect of the British Columbia carbon tax using two empirical methods, a reduced-form econometric model and counterfactual simulations conducted using an applied general equilibrium (CGE) model. The comparison allows us to test the theory-driven predictions of the CGE model. It also allows us to test the identification strategy of our econometric model. Ex-post, we find statistically and economically significant effects on sectoral employment levels from the carbon tax – with employment falling in the most carbon-intensive sectors and rising in the least carbon-intensive. The CGE model predicts employment responses of very similar sign and magnitude to our econometric estimates. We find no evidence to suggest that our econometric estimates are likely to be undermined by general equilibrium effects in this policy setting. Finally, we explore the use of the econometric estimates to deepen the empirical content of the CGE model.