Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/237707 
Year of Publication: 
2021
Series/Report no.: 
ECB Working Paper No. 2568
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement's goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy.
Subjects: 
DSGE model
open-economy macroeconomics
optimal policies
climate modelling
JEL: 
F42
E50
E60
F30
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4754-1
Document Type: 
Working Paper

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