Green transition in the Euro area: domestic and global factors

Pablo Garcia Sanchez, Pascal Jacquinot, Črt Lenarčič, Kostas Mavromatis, Niki Papadopoulou and Edgar Silgado-Gómez
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Pascal Jacquinot: EUROPEAN CENTRAL BANK
Kostas Mavromatis: DE NEDERLANDSCHE BANK
Niki Papadopoulou: EUROPEAN CENTRAL BANK
Edgar Silgado-Gómez: BANCO DE ESPAÑA

No 2537, Working Papers from Banco de España

Abstract: We explore the macroeconomic effects of climate policies promoting the green energy transition in the euro area using an extended version of the Euro Area and Global Economy (EAGLE) model. The model differentiates between brown and green energy sectors and incorporates carbon taxes and brown capital income taxes. We analyze scenarios with unilateral and globally coordinated carbon taxes, with and without revenue redistribution to green firms and financially constrained households. Carbon taxes act as negative supply shocks, raising inflation and lowering output, while subsidies to green energy firms reduce green energy prices, supporting the transition and easing recessions. Redistribution to constrained households boosts consumption but does not accelerate the green transition. Taxes on brown capital income lower both inflation and output by acting as demand shocks. Recycling revenue from this tax to subsidize green capital investment strengthens the shift to green energy and moderates economic contractions. Global coordination of carbon taxes delivers only modest additional macroeconomic effects compared with unilateral action, as substitution in energy use outweighs international spillovers. Sensitivity analyses confirm the robustness of these findings under alternative assumptions about price rigidity, substitution elasticities and monetary policy.

Keywords: climate policy; carbon taxation; fiscal policy; monetary policy; euro area; DSGE modeling (search for similar items in EconPapers)
JEL-codes: C53 E32 E52 F45 H30 Q48 (search for similar items in EconPapers)
Pages: 104 pages
Date: 2025-10
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Related works:
Working Paper: Green Transition in the euro area: Domestic and global factors (2024)
Working Paper: Green Transition in the Euro Area: Domestic and Global Factors (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2537

DOI: 10.53479/40866

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