Firm Productivity and the Composition of Jobs in the Green Economy: Factor Reallocation with Heterogeneous Clean Destinations

We study the macroeconomic consequences of emissions reductions in a model with heterogeneous firms, search-and-matching frictions, endogenous technology adoption, and sector-specific capital adjustment costs. Extending the framework of Finkelstein Shapiro and Metcalf (2023) and calibrating to Finland, we distinguish between high- and low-productivity clean technologies within a three-sector framework. Our results show that an emission reduction policy implemented via a carbon tax induces modest losses in output and consumption, as part of the reallocation away from emissions-intensive sector is absorbed by lower-productivity clean sector. By contrast, the standard two-sector model with a single clean technology shows slightly positive output effects due to a greater increase in average firm productivity. These findings highlight that the macroeconomic costs of climate policies depend on the productivity composition of the expanding clean sector. Within the emissions-intensive sector, emissions are mainly reduced through abatement activities, but the degree of factor reallocation is still substantial: under the baseline calibration, employment in the emissions-intensive sector declines by nearly one-quarter in response to a 40% emissions reduction target. Lower abatement costs reduce the extent of factor reallocation required to achieve a given emissions reduction target.