Conference Agenda

This paper explores the macroeconomic and distributional impacts of the European Union’s transition to net zero emissions, with a focus on carbon pricing and compensation policies. Using an Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model featuring energy and non-energy sectors, as well as heterogeneous households, this study examines the effects of both a short-term shock and a long-term transition. In the short term, a carbon tax shock leads to inflationary pressures and a contraction in output. Over the long term, a gradually increasing carbon tax drives the economy toward zero emissions, with rational agents anticipating income reductions and generating deflationary effects during the transition. Redistribution mechanisms, including direct household transfers and firm subsidies funded by carbon tax revenues, are evaluated for their ability to mitigate inequality and sustain consumption. While direct transfers effectively reduce consumption gaps temporarily, firm subsidies offer broader macroeconomic stabilization. The analysis extends to scenarios with expectation errors, revealing how deviations from anticipated policy paths intensify volatility and alter the trajectory of energy transition dynamics. This research demonstrates the versatility of E-DSGE models in assessing the interplay between carbon policy, inequality, and long-term economic adjustment, offering valuable insights for designing equitable and efficient climate strategies.