Penalizing Brown industries or stimulating green innovation? A model incorporating endogenous green innovation

In this paper, we develop a dynamic stochastic general equilibrium model that incorporates endogenous green total factor productivity (GTFP) to assess how penalizing brown industries and supporting green innovation influence carbon-reduction targets. Our analysis shows that, rather than relying solely on carbon taxes for brown firms, institutional mechanisms that promote green innovation and research and development (R&D) investment more effectively achieve the dual objectives of lowering emissions and sustaining economic growth. Counterfactual analyses further indicate that reducing R&D adjustment costs and strengthening R&D spillover effects substantially amplify these benefits. We also evaluate welfare outcomes under endogenous GTFP and identify optimal monetary policy parameters. The core policy implication is that institutional innovation can lower the marginal costs of green transition, enabling environmental and economic gains to reinforce one another.