Road to Net Zero: Carbon Policy and Redistributional Dynamics in the Green Transition
Alessandro Sardone
IWH Discussion Papers,
No. 16,
2025
Abstract
This paper examines the macroeconomic and distributional effects of the European Union’s transition to Net Zero emissions through a gradually increasing carbon tax. I develop a New Keynesian Environmental DSGE model with two household types and distinct energy and non-energy sectors. Five alternative uses of carbon tax revenues are considered: equal transfers to households, targeted transfers to Hand-to-Mouth households, subsidies to green energy firms, and reductions in labor and capital income taxes. In the absence of technological progress, the carbon tax policy induces a persistent increase in energy prices and a reduction in GDP, investment, and consumption. Headline inflation falls below zero in the medium run, reflecting weaker aggregate demand. Distributional outcomes vary significantly depending on the implemented revenue recycling scheme: targeted transfers are the most progressive but entail larger macroeconomic costs, while subsidies and tax cuts mitigate output and investment losses but are less effective in narrowing the consumption gap. A limited foresight scenario, in which agents learn about policy targets sequentially, generates more volatile adjustment paths and temporary inflationary spikes around announcements, but long-run outcomes remain close to the baseline.
Read article
IWH-DPE in a Nutshell
IWH-DPE in a Nutshell The IWH Doctoral Programme in Economics (IWH-DPE) is the unit that organises the education of doctoral students at the IWH in close cooperation with partner…
See page
Archive
Media Response Archive 2021 2020 2019 2018 2017 2016 December 2021 IWH: Ausblick auf Wirtschaftsjahr 2022 in Sachsen mit Bezug auf IWH-Prognose zu Ostdeutschland: "Warum Sachsens…
See page
Monitoring
Monitoring Interim Report We are pleased to announce that the first interim report for the project is now available for publication, offering stakeholders a comprehensive overview…
See page
Output
Output This page provides an overview of the Output generated as part of the Microdata platform for productivity, which aims to help national productivity boards improve their…
See page
Research Articles
Research Articles Explore cutting-edge research based on CompNet’s micro-aggregated firm-level data and related analytical tools. These articles cover empirical and theoretical…
See page
4th TSI Workshop
4th TSI Workshop The 4th Technical Support Instrument (TSI) Workshop was a significant event in the TSI program series, focusing on enhancing collaboration among National…
See page
2nd TSI Workshop
Presentations 2nd TSI Workshop - Halle, Germany Welcome Note - Filippo di Mauro 1. Energy - Laura Lehtonen, Alessansdro Zona Mattioli 2. Competitiveness - Marco Matani, Sara…
See page
Reports
Reports Flagship Firm Productivity Report 2023 Introducing the release of the 2023 Flagship Firm Productivity Report , providing critical insights into the short-term impact of…
See page
Workshops & Events
TSI Workshops Our TSI program involves a workshop with the participating countries twice a year. The 1st TSI Workshop took place in Lisbon, at the Statistical Office of Portugal…
See page
