Abstract
Green preferences are often seen as crucial for mitigating climate change. Yet, it remains unclear whether they alone can drive the shift toward a low-carbon economy and what the distributional consequences might be. This paper studies the macroeconomic, environmental, and distributional effects of green preferences among consumers and producers using the agent-based integrated assessment MATRIX model. We compare scenarios with varying pro-environmental attitudes to conventional supply-side climate policies like carbon taxes and cap-and-trade mechanisms, with and without abatement investment subsidies and alternative redistribution strategies. Without an active policy, achieving a low-carbon transition requires unrealistically high values of green preferences among consumers and producers. Conversely, carbon taxes and cap-and-trade mechanisms can reach that objective, but at the cost of increased instability and inequality. Moderate abatement subsidies can balance those effects, reducing emissions while mitigating both economic and distributional challenges, especially when environmental revenues fund social transfers instead of tax cuts.
Generated Summary
This study investigates the impact of green preferences on the transition towards a Low-Carbon Economy (LCE) and compares it with different market-based climate policies. The authors use and expand an agent-based integrated assessment MATRIX model, incorporating a preference structure that accounts for the implicit emissions content of goods and an endogenous learning process for firms’ emissions reduction decisions. The research assesses the macroeconomic, environmental, and distributional effects of pro-environmental consumption and examines the outcomes against scenarios with various supply-side climate policies, such as a carbon tax and Cap-and-Trade (CaT) mechanism at different policy intensities. For each experiment, the aggregate and sectoral variation in key economic and environmental variables relative to the BAU scenario, as well as the distributive impacts in households’ and firms’ net worth distribution are examined. The combined effects of demand- and supply-side interventions with an abatement subsidy, also considering alternative redistributive policies reflecting the policy-maker’s preferences are analyzed to determine optimal policies for the LCE.
Key Findings & Statistics
- In the HGP (Households Green Preferences) scenario, the increase in green preferences does not produce significant changes compared to the Business-As-Usual (BAU) scenario.
- In the AGP (All Sectors Green Preferences) scenario, the system can foster the transition to a Low-Carbon Economy (LCE) without reducing real GDP.
- The AGP scenario, with maximum levels of GPs (ηH = ηF = 0.157), the system can achieve a low carbon transition in 2100.
- In AGP scenario, a 50% drop in CO2 emissions is achievable by the end of the century in the presence of a medium-high pro-environmental attitude.
- In the HGP scenario, the impact on national emissions is minimal, with a maximum reduction of only 40% in 2100, even in the most extreme case (i.e., ηH = 0.157).
- The carbon tax introduces a crucial distinction: it generates an environmental fiscal budget for the government, which is immediately redistributed through social transfers and reduced income taxes.
- The CX (Carbon Tax) policy produces similar results to the AGP but with greater inflation volatility.
- The CaT (Cap and Trade) mechanism produces higher price levels and generally worse economic performance than the CX policy across most adjustment speeds.
- The study finds that the combination of green subsidies with carbon pricing mechanisms can be effective in achieving the goals.
Other Important Findings
- The AGP scenario, by introducing GPs in both household and the corporate sector, leads to a 50% drop in CO2 emissions by the end of the century.
- The study highlights that the CaT scheme is more effective from an environmental perspective, as it steers the system towards low-carbon emissions more quickly by imposing stricter constraints.
- The HGP scenario fails to achieve a LCE even with a high level of consumer engagement.
- The CX and CaT policies are nearly equivalent when it comes to curbing emissions.
- The HGP scenario fails to achieve a LCE even with a high level of consumer engagement (ηH = 0.157), resulting in emission reduction equal to -16.0% by 2050 and -38.0% by 2100, while its economic impact remains negligible.
- The AGP scenario exhibits similar dynamics to CX but with greater inflation volatility.
- A carbon tax combined with high levels of AbT subsidies can lead to a LCE transition.
- The CaT mechanism is more effective in steering the system towards low-carbon emissions quickly by imposing stricter constraints.
Limitations Noted in the Document
- The evaluation of emission reductions is conducted within a single national economy, neglecting the global feedback effects of climate change and local climate damages on economic dynamics.
- Green preferences are treated as exogenous variables.
- Emissions reductions are modeled through a generalized abatement sector, not accounting for factors like hard-to-abate sectors, carbon capture and storage, or negative emission technologies.
- The economic contraction largely arises from firms transferring abatement costs to consumers, reducing overall sales and income.
- The research does not explicitly account for factors like hard-to-abate sectors, carbon capture and storage, or negative emission technologies.
Conclusion
The research findings underscore the importance of green preferences and their interplay with climate policies in driving the transition to a Low-Carbon Economy (LCE). The AGP scenario, which integrates green preferences across households and firms, shows the potential to achieve significant emission reductions without diminishing real GDP. The study’s emphasis on the dynamics between consumer behavior, firm strategies, and policy interventions provides valuable insights for policymakers. The study suggests the CaT (Cap and Trade) scheme is more effective from an environmental perspective, as it steers the system towards low-carbon emissions more quickly by imposing stricter constraints. The study validates the effectiveness of combining green subsidies with carbon pricing mechanisms, demonstrating that moderate to high abatement subsidies can effectively support the transition while mitigating economic disruption. The results indicate that the potential for economic instability might be associated with the CaT policies. The study highlights the importance of considering distributional effects and fiscal implications when designing climate policies, emphasizing the need for a nuanced approach that balances environmental goals with economic stability and social equity. The results demonstrate that moderate to high abatement subsidies (50 – 100% of costs) can effectively support the transition while mitigating economic disruption, but their fiscal implications must be carefully managed to prevent excessive public debt accumulation. Moreover, the analysis reveals that redistributing environmental revenues through social transfers rather than tax cuts produces better distributional outcomes and helps maintain public support. This requires careful balancing with fiscal stability goals. The results suggest that a strong business sector participation amplifies policy effectiveness.