The macroeconomics of green transitions

Gregor Boehl, Flora Budianto and Elod Takats

No 1237, BIS Working Papers from Bank for International Settlements

Abstract: The paper investigates the macroeconomics of an energy transition – a shift from brown to green energy production through carbon taxation. Using a medium-scale DSGE model with energy production sectors and endogenous innovation in the green energy sector, we show that an energy transition – initiated through a brown energy tax – resembles a large supply side shock, causing a surge in inflation and energy prices and a decline in consumption. Innovation increases the efficiency of green energy production and drives energy prices down in the medium run. We document that monetary policy plays a critical role for the dynamics and pace of the transition, even if the transition is not explicitly part of the policy rule. A monetary policy with less emphasis on inflation stabilization allows for temporarily higher inflation and energy prices, which boosts R&D and innovation, enhancing welfare and accelerating the transition.

Keywords: energy transition; innovation; inflation dynamics; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 O44 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene and nep-env
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