Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273082 
Year of Publication: 
2023
Series/Report no.: 
IMFS Working Paper Series No. 187
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
Climate change has become one of the most prominent concerns globally. In this paper, we study the transition risk of greenhouse gas emission reduction in structural environmental-macroeconomic DSGE models. First, we analyze the uncertainty in model prediction on the effect of unanticipated and pre-announced carbon price increases. Second, we conduct optimal model-robust policy in different settings. We find that reducing emissions by 40% causes 0.7% - 4% output loss with 2% on average. Pre-announcement of carbon prices affects the inflation dynamics significantly. The central bank should react slightly less to inflation and output growth during the transition risk. With optimal carbon price designs, it should react even less to inflation, and more to output growth.
Subjects: 
Climate change
Environmental policy
Optimal policy
Transition risk
Model uncertainty
DSGE models
JEL: 
Q58
E32
Q54
C11
E17
E52
Document Type: 
Working Paper

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