Macroeconomic effects of carbon transition policies: An assessment based on the ECB’s New Area-Wide Model with a disaggregated energy sector

Günter Coenen, Matija Lozej and Romanos Priftis

European Economic Review, 2024, vol. 167, issue C

Abstract: We assess the macroeconomic effects of carbon transition policies aimed at mitigating climate change in the euro area. To this end, we augment the ECB’s New Area-Wide Model (NAWM) with a framework of disaggregated energy production and use, which distinguishes between “dirty” and “clean” energy. Our central transition policy is that of a permanent increase in carbon taxes, which are levied as a surcharge on the price of dirty energy, combined with a price-preserving fall in fossil resource supply. Our findings suggest that increasing carbon taxes to an interim target level consistent with the transition to a net-zero economy entails a transitory rise in inflation and a lasting, albeit moderate decline in GDP. We show that the short and medium-term effects depend on the monetary policy reaction, the path of the carbon tax increase and its credibility, while expanding clean energy supply is key for containing the decline in GDP. Undesirable distributional effects can be addressed by appropriately redistributing the fiscal revenues from the carbon tax increase across households.

Keywords: Climate change; Carbon taxation; DSGE model; Monetary policy; Fiscal policy; Euro area (search for similar items in EconPapers)
JEL-codes: C54 E52 E62 H23 Q43 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (7)

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Working Paper: Macroeconomic Effects of Carbon Transition Policies: An Assessment Based on the ECB’s New Area-Wide Model with a Disaggregated Energy Sector (2023)
Working Paper: Macroeconomic effects of carbon transition policies: an assessment based on the ECB’s New Area-Wide Model with a disaggregated energy sector (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:167:y:2024:i:c:s0014292124001272

DOI: 10.1016/j.euroecorev.2024.104798

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