Evaluating economy-wide impacts of complex regulations: A hybrid linking approach for detailed sector and CGE models

We develop a novel methodology for linking a detailed sector model with a computable general equilibrium (CGE) model to estimate the economy-wide social costs and distributional impacts of a complex environmental regulation when an iterative linkage between models is not possible. We demonstrate the linking approach using stylized compliance choices and costs that are consistent with the types of model outputs typically available from a technology-rich sector model. We use this stylized information to calibrate parameters that produce an identical equilibrium response in a corresponding partial equilibrium sub-model of the CGE model. The calibrated parameters, which represent the regulatory requirements, are then passed to the full CGE model to estimate general equilibrium impacts. This methodology allows us to translate partial equilibrium impacts into economy-wide impacts while retaining consistency with the projected compliance behavior from the sector model. We provide a worked example for an illustrative electricity sector regulation using U.S. EPA’s CGE model, SAGE, and also discuss the challenges of operationalizing this methodology in a real-world setting.