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Environmental Subsidies to Mitigate Net-Zero Transition Costs

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  • Eric Jondeau
  • Grégory Levieuge
  • Jean-Guillaume Sahuc
  • Gauthier Vermandel

Abstract

We explore the role of public subsidies in mitigating the transition costs associated with achieving a climate-neutral objective by 2060. To this end, we develop and estimate a quantitative macro-climate model for the world economy featuring an endogenous market structure for carbon abatement products. Public subsidies, fully financed by a carbon tax, are found to be an efficient instrument to promote firm entry into the abatement good sector by fostering competition and lowering the selling price of such products. We estimate that the subsidy, optimally distributed between startups at 60% and existing companies at 40%, would save nearly $2.9 trillion in world GDP each year by 2060. Finally, delaying the net-zero transition would require giving an even larger share to startups.

Suggested Citation

  • Eric Jondeau & Grégory Levieuge & Jean-Guillaume Sahuc & Gauthier Vermandel, 2023. "Environmental Subsidies to Mitigate Net-Zero Transition Costs," Working papers 910, Banque de France.
    • Handle: RePEc:bfr:banfra:910
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    2. Caterina Seghini & Stéphane Dees, 2024. "The Green Transition and Public Finances," Working papers 949, Banque de France.

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    More about this item

    Keywords

    Climate Change; Macro-Climate Model; Environmental Goods and Services Sector; Endogenous Market Structure; Stochastic Growth; Bayesian Estimation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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