Carbon taxes may need permanent boost to meet emission targets

Ever wondered how climate policies like carbon taxes shape our economy over time? Stefan’s research reveals that in the short term, our ability to swap fossil fuels for greener alternatives is limited and so is the efficacy of carbon taxes. However, as time stretches on, this substitutability gains momentum. Constructing a growth model to shed light on this phenomenon, the findings suggest that to meet long-term emission targets, carbon taxes may need permanent boost.

Electrification sparks change

The electrification of production processes is a pivotal step towards reducing carbon emissions. Investigating aggregate trends in the United States, Stefan unearths intriguing patterns: in the short term, fossil fuels and electricity are strong allies, but over time they become more interchangeable, allowing electricity to take up a larger share of the energy mix. Using a quantitative model, Stefan shows how directed technological advancements are the driving force behind this electrifying transformation.

Charting the energy transition

Transitioning to a low-carbon economy involves a multi-faceted approach. Developing a comprehensive framework, Stefan identifies three key mechanisms propelling this shift: advancements in energy efficiency, directed technical change towards electrification, and the expansion of green energy infrastructure. Simulating the model, he finds that while even a laissez-faire approach fosters some progress, the transition needs to be accelerated through carbon taxation to meet ambitious targets like net zero emissions by 2050. While this accelerated transition comes at some economic costs, the then net-zero-economy, having freed itself from fossil shackles, grows at higher rates than in laissez-faire.

Green subsidies: catalysts for change

Green subsidies are a vital tool in nudging industries towards eco-friendly practices. By factoring in technology and learning-by-doing externalities as well as their interdependencies, Stefan reveals the profound impact of subsidies that target these externalities. They project a significant reduction in fossil fuel usage over the coming decades, highlighting the intricate interplay between different policy levers. However, caution is warranted: imperfect instruments like Investment Tax Credits may inadvertently trigger rebounds in fossil fuel consumption after their expiration.

As we navigate the complexities of climate policy and energy transition, these insights serve as guiding beacons illuminating the path forward. By embracing innovative solutions and forging collective action, we can steer our world towards a sustainable future, where economic prosperity harmonizes with environmental stewardship.

The thesis “On the Macroeconomics of the Energy Transition” can be downloaded and read in its entirety at DiVA:

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Stefan will defend his thesis on 12 June at 10.00 am.

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