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Session Chair: Peter Kruse-Andersen, University of Copenhagen
Location:Auditorium K
Presentations
Meeting Climate Targets: The Optimal Fiscal Policy Mix
Sonja Dobkowitz
DIW Berlin, Germany
Discussant: Anna-Maria Goeth (Humboldt University of Berlin)
This paper studies the optimal fiscal policy mix for the green transition under
realistic fiscal constraints. I develop a model with directed technical change and learning-
by-doing, where an emission target renders fossil energy use socially costly. In a calibration
to the US, I quantify the optimal mix of carbon taxes, research subsidies, and distortionary
labor income taxes. The central insight is that the optimal fiscal mix internalizes its impact
on R&D investment and learning-by-doing. Carbon taxes encourage both green R&D and
learning, justifying rates above the social cost of carbon. In contrast, labor income taxes
suppress learning-by-doing, especially in the green sector, where experience is initially scarce.
Throughout the transition, labor taxes are lower than absent learning-by-doing. In a more
constrained regime where carbon tax revenues are rebated lump-sum, the government insufficiently
subsidizes research on energy-related technologies to preserve green learning-by-doing.
Capital Adjustment Costs and Stranded Assets in an Optimal Green Energy Transition
Anna-Maria Goeth1,2, Michael Burda1, Leopold Zessner-Spitzenberg3
1Humboldt University of Berlin; 2World Bank; 3TU Wien
Discussant: Alessandro Sardone (Halle Institute for Economic Research)
We study green energy transitions in a three-sector growth model with a binding carbon budget. In the long run, clean and dirty energy are perfect substitutes, but their short-run substitutability is finite and endogenously determined by capital adjustment costs.
Of three available means of CO2 emissions reduction – reduction in energy consumption, redeployment of labor, and new investment – the most important is the investment channel. Ramsey optimal paths mandate front-loaded clean investment long before complete phase-out of dirty energy generation and robustly imply stranding of dirty energy capital when the carbon budget is exhausted. If optimally implemented, the amount of stranded capital is modest, even under an ambitious carbon budget at 2.7% of GDP. If the same shift to an ambitious carbon budget is postponed by a decade, stranded capital rises to 13% of annual GDP.
Road to Net Zero: Carbon Policy and Redistributional Dynamics in the Green Transition
Alessandro Sardone
Halle Institute for Economic Research, Germany
Discussant: Peter Kruse-Andersen (University of Copenhagen)
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.
Energy Efficiency Dynamics and Climate Policy
Peter Kruse-Andersen1, Yang Gao2, Gregory Casey3
1University of Copenhagen, Denmark; 2University of California, Santa Barbara, United States; 3Williams College, United States
Discussant: Sonja Dobkowitz (DIW Berlin)
We study the effectiveness of climate change mitigation policies in reducing carbon emissions, focusing on the channel of economy-wide energy efficiency. Using U.S. data, we estimate impulse response functions (IRFs) that characterize how energy efficiency responds to energy price shocks. Standard climate-economy models cannot replicate the slow transition dynamics observed in the data. We build a tractable model that nests the existing literature and can closely replicate the empirical IRFs. The slow dynamics in our model imply that carbon taxes reduce cumulative emissions less than predicted by standard models and that clean energy subsidies reduce cumulative emissions more than predicted by standard models.
