Environmental control, debt leverage in “old vs. new” energy sectors and climate-fiscal policy: A multi-sector EE-DSGE approach

Zongming Liu and Wenhui Shi

Economic Modelling, 2025, vol. 151, issue C

Abstract: This study examines the differential impacts of environmental regulations and climate-related fiscal policies on debt leverage and economic dynamics in China's traditional fossil fuel and renewable energy sectors. Using data from Chinese A-share listed companies, we find that environmental policies increase debt leverage in fossil fuel firms while reducing it in renewable energy firms. To further investigate these sector-specific effects, we develop a multi-sector energy-environment dynamic stochastic general equilibrium (EE-DSGE) model. Our results show that climate policies raise asset values and reduce leverage in renewable firms, while causing output declines and increasing asset risk in fossil fuel firms. Counterfactual simulations suggest that reducing carbon intensity and abatement costs, along with enhancing renewable productivity, can stimulate investment and gross domestic product growth while restraining inflation. Moreover, green fiscal incentives outperform brown penalties by more effectively encouraging renewable investment and minimizing economic losses. These findings highlight the importance of targeted fiscal policies in supporting a sustainable energy transition and provide actionable insights for policymakers.

Keywords: Environmental regulation; Debt leverage; Energy sector; Carbon reduction; Climate fiscal policy (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001877

DOI: 10.1016/j.econmod.2025.107192

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