A Model of the Model: Unpacking CGE Results on Carbon Leakage

Computational general equilibrium (CGE) models can evaluate detailed tax reforms, trade restrictions, or environmental policy. These models can capture many complexities, but these complexities can make results difficult to interpret. Analytical general equilibrium (AGE) models provide better intuition and interpretation but cannot capture relevant complexities. We propose a method that employs AGE models to understand CGE models – a “model of the model”. We apply this idea to climate policy and carbon leakage – the increase in emissions elsewhere. Our AGE models identify seven key economic determinants of leakage within any one outcome. We then unpack results from three existing CGE models.