Is environmental innovation the key to addressing the dual economic and sustainability challenge of the Italian economy?

The effects of rising global temperatures are becoming increasingly evident, with observable consequences such as the melting of polar ice caps, the occurrence of cyclones and hurricanes, desertification, and the destruction of ecosystems. The Italian economy is particularly vulnerable to the climate challenge, due to the prolonged slowdown in economic growth and the high unemployment that have plagued this economy over the last decades. Environmental innovation could be the key to tackling climate change, while at the same time promoting growth and employment. A comprehensive assessment of the effects of environmental innovation on growth and employment at the macroeconomic level should consider the compensation mechanisms associated with productivity gains, the substitution effects between more or less polluting goods, and the role of demand and consumer preferences. However, a comprehensive analysis that includes all of these direct and indirect effects of environmental innovation at the macroeconomic level is still lacking. This study aims to bridge this gap, introducing a structuralist computable general equilibrium model to simulate the effects of an increase in productivity and a change in consumer preferences in favour of less polluting industries in the Italian economy over the period 1995–2050. The results of the simulations indicate that a change in consumer preferences in favour of environmentally friendly goods in the Italian context may be more effective than an increase in productivity in stimulating demand, growth, and employment.