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Environmental Subsidies to Mitigate Transition Risk

Author

Listed:
  • Eric Jondeau

    (University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute)

  • Gregory Levieuge

    (Banque de France)

  • Jean-Guillaume Sahuc

    (Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX)

  • Gauthier Vermandel

    (Ecole Polytechnique; Department of Economics, Paris-Dauphine)

Abstract

We explore the role of public subsidies in mitigating the transition risk associated with a climate-neutral objective by 2060. We develop and estimate an environmental dynamic stochastic general equilibrium model for the world economy featuring an endogenous market structure for green products. We show that public subsidies, financed by a carbon tax, are an efficient instrument to promote firm entry into the abatement goods 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%, will save nearly $2.9 trillion in GDP each year by 2060.

Suggested Citation

  • Eric Jondeau & Gregory Levieuge & Jean-Guillaume Sahuc & Gauthier Vermandel, 2022. "Environmental Subsidies to Mitigate Transition Risk," Swiss Finance Institute Research Paper Series 22-45, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2245
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    Cited by:

    1. Burgold, Peter & Ernst, Anne & Hinterlang, Natascha & Jäger, Marius & Stähler, Nikolai, 2025. "Cap and Trade versus tradable performance standard: A comparison for Europe and China," Discussion Papers 02/2025, Deutsche Bundesbank.
    2. Burgold, Peter & Ernst, Anne & Hinterlang, Natascha & Jäger, Marius & Stähler, Nikolai, 2025. "Cap and trade versus tradable performance standard in a production network model with sectoral heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 178(C).
    3. Finkelstein-Shapiro, Alan & Nuguer, Victoria, 2023. "Climate Policies, Labor Markets, and Macroeconomic Outcomes in Emerging Economies," IDB Publications (Working Papers) 12813, Inter-American Development Bank.
    4. Finkelstein Shapiro, Alan & Metcalf, Gilbert E., 2023. "The macroeconomic effects of a carbon tax to meet the U.S. Paris agreement target: The role of firm creation and technology adoption," Journal of Public Economics, Elsevier, vol. 218(C).

    More about this item

    Keywords

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    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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