Energy Shocks and the Green Adoption Channel According to E-HANK

We build a E-HANK model, an Environmental-Heterogeneous Agent New Keynesian model with an energy sector, distinguishing clean from dirty energy and allowing households to adopt a costly clean energy technology. We use this framework to study the transmission of fossil energy shocks and the effectiveness of fiscal, monetary, and climate policy responses. Clean technology adoption acts as a stabilizing channel, dampening inflation and output losses relative to an economy with no adoption or only fossil fuels available. Energy price subsidies shield fossil energy users but weaken adoption incentives, creating a policy trade-off that (un)targeted transfers avoid while still insulating households. An aggressive monetary response yields small, short-lived inflation gains at a large output cost, and slows down adoption. Recycling carbon revenues into clean technology subsidies rather than lump-sum rebates has the potential to green the economy and dampens the inflationary impact of energy shocks, but comes at the cost of shifting the burden of higher energy prices on the households least able to adopt.