Safeguarding macro-financial stability under carbon pricing and rapid energy transition

Luca E. Fierro, Severin Reissl, Francesco Lamperti, Emanuele Campiglio, Laurent Drouet, Johannes Emmerling, Elise Kremer and Massimo Tavoni

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Although the case for a swift climate transition is clear, its macro-financial viability remains uncertain. To shed light on the macroeconomic and financial response to deep mitigation trajectories controlled by carbon pricing, we soft-link a process-based integrated assessment model (the World Induced Technical Change Hybrid, WITCH) to a macro-financial agent-based model (the Dystopian Schumpeter Meeting Keynes, DSK). The hybrid framework allows us to translate energy systems transformations into macro-financial outcomes at business cycle frequency. We find that rapid transitions induced by fast-growing carbon prices significantly impact unemployment, inflation, and income distribution. Stabilization policies reduce these economic fluctuations, though not completely so in Paris-compatible scenarios. Our paper emphasizes the need for coordinated climate and macroeconomic policy during decarbonization. Additionally, it showcases how model integration can lead to a better understanding of the economic implications of low-carbon futures.

JEL-codes: F3 G3 J01 N0 R14 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2026-04-07
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Published in Communications Earth and Environment, 7, April, 2026, 7(1). ISSN: 2662-4435

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