Conference Agenda

How to optimally finance research subsidies in the transition to net-zero emissions?

I study a model of directed technical change and learning by doing in which an emission limit renders the use of fossil energy socially costly. In a calibration to the US, I quantify the optimal mix of carbon taxes, research subsidies, and distortionary labor income taxes. I find that a labor tax of up to 2.5\% should complement carbon tax revenues to finance research subsidies. This policy is optimal even though the government would like to spur learning by subsidizing labor. The lower level of output\textemdash relative to a policy regime with non-distortive fiscal instruments\textemdash allows to reduce the carbon tax. The lower carbon tax, in turn, implies that R&D in the fossil sector becomes more profitable as more fossil energy is consumed. Research subsidies adjust to keep research in the green sector. However, the heightened labor tax lowers learning rates which affects the sector with the lower level of expertise, i.e. the green sector, more adversely. New green knowledge loses in value, and it becomes optimal to cut green research subsidies. I find that in the transition to net zero, the former while in the long run, the latter effect dominates.

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.

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.

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.