Green investment support measures: a multi-sectoral, macro-financial analysis for the European Union

The transition to a low-carbon economy requires substantial investment to replace the production technologies and infrastructure reliant on fossil fuels. In addition to regulation and carbon pricing, a range of financial policies has been proposed to accelerate green investment. This article evaluates the implications of three of them - direct green investment subsidies, green public guarantees, and capital market deepening - in terms of emission reduction, economic activity, and public debt. The analysis relies on a stock-flow consistent, input-output model of the EU economy, which explicitly incorporates industries' marginal abatement costs, intersectoral input-output linkages, and investment financing channels. Model simulations reveal that direct subsidies are the most effective tool for achieving significant emission reductions; however, they also result in substantial increases in the debt-to-GDP ratio. In contrast, public guarantees and equity market development tend to strengthen public finances and economic activity but yield only moderate emission cuts. The results further suggest that combining policies can effectively balance emission mitigation and economic activity without compromising public finance sustainability.