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

We treat the implementation of the carbon tax in British Columbia as a natural experiment and compare the results of econometric estimates of its effects to counterfactual experiments conducted using an applied general equilibrium (CGE) model of the Canadian economy. The comparison allows us to test the theory-driven predictions of the CGE model. It also allows us to test the identifcation strategy of our econometric model, using the CGE model to indicate under what circumstances general equilibrium policy responses might undermine our attempts at statistical inference. Ex post, we find statistically and economically signifcant effects on sectoral employment levels from the carbon tax --- with levels falling in the most carbon-intensive sectors and rising in the least carbon-intensive. Ex ante, we predict employment responses of very similar sign and magnitude to our econometric measurements (Pearson correlation coefficient of approximately 0.9). We find no evidence to suggest that our difference-in-difference estimator is 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.