Carbon pricing, border adjustment and renewable energy investment: a network approach

Mar Delgado-Téllez, Javier Quintana and Daniel Santabárbara

No 3020, Working Paper Series from European Central Bank

Abstract: An increase of e100 per tonne in the EU carbon price reduces the carbon footprint but lowers GDP due to higher energy costs and carbon leakage. Using a dynamic multi-sector, multi-country model augmented with an energy block that includes endogenous renewable energy investment, we analyze the macroeconomic and emissions effects of a carbon price. Investment in renewable energy mitigates electricity price increases in the medium term, leading to a smaller GDP loss (up to -0.4%) and a larger emissions reduction (24%) in the EU. Neglecting renewable energy investment overestimates the negative economic impact. We also find that a Carbon Border Adjustment Mechanism (CBAM) reduces carbon leakage but slightly hurts GDP and inflation as the competitive gain is offset by the higher costs of imported intermediate inputs. JEL Classification: C6, H2, Q5

Keywords: carbon border adjustment; carbon pricing; production networks; renewable energy investment (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-ene, nep-env, nep-int and nep-net
Note: 1488806
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253020

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