Taking the green pill: Macro-financial transition risks and policy challenges in the MATRIX model

Emanuele Ciola, Enrico M. Turco, Massimiliano Rizzati, Davide Bazzana and Sergio Vergalli
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Enrico M. Turco: Fondazione Eni Enrico Mattei and Department of Economics and Finance, Catholic University of Sacred Heart, Milan
Massimiliano Rizzati: Fondazione Eni Enrico Mattei and Department of Economics and Management, Università degli Studi di Brescia
Davide Bazzana: Fondazione Eni Enrico Mattei and Department of Economics and Management, Università degli Studi di Brescia
Sergio Vergalli: Fondazione Eni Enrico Mattei and Department of Economics and Management, Università degli Studi di Brescia

No 2024.27, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper evaluates the macroeconomic and financial risks of the energy transition using an extended MATRIX model, a multi-agent, multi-sector integrated assessment framework for the Euro Area. The model features endogenous, directed technical change in the energy sector and a decentralized electricity market based on merit-order rule. Energy firms switch technologies based on relative profitability, capturing feedback loops between R&D, productivity gains, and competitiveness, which may lead to either brown lock-in or green energy transition. We compare conventional policies – brown tax (BT), unconditional green subsidy (GS), and conditional green subsidy (CGS) linked to R&D – with alternative policy mixes, such as coordinated monetary policy, green finance and green industrial policy. Results show that while conventional policies modestly increase transition likelihood, they entail GDP losses due to production and financial constraints. These can be mitigated with green industrial policy and green finance, which alleviate sectoral bottlenecks and foster a more effective transition.

Keywords: Energy Sector; Agent-Based Models; Macroeconomic Dynamics; Directed Technological Change; Green Transition (search for similar items in EconPapers)
JEL-codes: C63 E61 O33 Q43 Q55 (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-env, nep-hme and nep-ino
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Working Paper: Taking the green pill: Macro-financial transition risks and policy challenges in the MATRIX model (2024)
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