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Green transition in the Euro area: domestic and global factors

Author

Listed:
  • Pablo Garcia

    (BANQUE CENTRALE DU LUXEMBOURG)

  • Pascal Jacquinot

    (EUROPEAN CENTRAL BANK)

  • Crt Lenarcic

    (BANKA SLOVENIJE)

  • Kostas Mavromatis

    (DE NEDERLANDSCHE BANK)

  • Niki Papadopoulou

    (EUROPEAN CENTRAL BANK)

  • Edgar Silgado-Gómez

    (BANCO DE ESPAÑA)

Abstract

We explore the macroeconomic effects of climate policies promoting the green energy transition in the euro area using an extended version of the Euro Area and Global Economy (EAGLE) model. The model differentiates between brown and green energy sectors and incorporates carbon taxes and brown capital income taxes. We analyze scenarios with unilateral and globally coordinated carbon taxes, with and without revenue redistribution to green firms and financially constrained households. Carbon taxes act as negative supply shocks, raising inflation and lowering output, while subsidies to green energy firms reduce green energy prices, supporting the transition and easing recessions. Redistribution to constrained households boosts consumption but does not accelerate the green transition. Taxes on brown capital income lower both inflation and output by acting as demand shocks. Recycling revenue from this tax to subsidize green capital investment strengthens the shift to green energy and moderates economic contractions. Global coordination of carbon taxes delivers only modest additional macroeconomic effects compared with unilateral action, as substitution in energy use outweighs international spillovers. Sensitivity analyses confirm the robustness of these findings under alternative assumptions about price rigidity, substitution elasticities and monetary policy.

Suggested Citation

  • Pablo Garcia & Pascal Jacquinot & Crt Lenarcic & Kostas Mavromatis & Niki Papadopoulou & Edgar Silgado-Gómez, 2025. "Green transition in the Euro area: domestic and global factors," Working Papers 2537, Banco de España.
    • Handle: RePEc:bde:wpaper:2537
    DOI: https://doi.org/10.53479/40866
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    Keywords

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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