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Taking the green pill: Macro-financial transition risks and policy challenges in the MATRIX model

Author

Listed:
  • Ciola, Emanuele
  • Turco, Enrico
  • Rizzati, Massimiliano
  • Bazzana, Davide
  • Vergalli, Sergio

Abstract

This paper evaluates the macroeconomic and financial risks of the energy transition using an extended MATRIX model, a multi-agent, multi-sector integrated assessment framework for the Euro Area. The model features endogenous, directed technical change in the energy sector and a decentralized electricity market based on merit-order rule. Energy firms switch technologies based on relative profitability, capturing feedback loops between R&D, productivity gains, and competitiveness, which may lead to either brown lock-in or green energy transition. We compare conventional policies – brown tax (BT), unconditional green subsidy (GS), and conditional green subsidy (CGS) linked to R&D – with alternative policy mixes, such as coordinated monetary policy, green finance and green industrial policy. Results show that while conventional policies modestly increase transition likelihood, they entail GDP losses due to production and financial constraints. These can be mitigated with green industrial policy and green finance, which alleviate sectoral bottlenecks and foster a more effective transition.

Suggested Citation

  • Ciola, Emanuele & Turco, Enrico & Rizzati, Massimiliano & Bazzana, Davide & Vergalli, Sergio, 2024. "Taking the green pill: Macro-financial transition risks and policy challenges in the MATRIX model," FEEM Working Papers 348229, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemwp:348229
    DOI: 10.22004/ag.econ.348229
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    Keywords

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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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