E-QUEST: A multisector dynamic general equilibrium model with energy and a model-based assessment to reach the EU climate targets

Abstract

This paper describes a micro-founded, fully forward-looking dynamic general equilibrium model with energy sectors to analyze the macroeconomic impact of climate mitigation policy in the European Union. The paper presents simulation results for the transitional costs of moving toward a net-zero emissions economy in a budgetary-neutral way through regulation and carbon taxes. Our model allows for substitutability between fossil fuels and clean energy inputs and considers different recycling options for the revenues collected by carbon taxes. We find that the costs of moving toward a net-zero emissions economy can be significantly reduced when carbon taxes are recycled to reduce other distortive taxes or subsidize clean energy. Our scenarios also show that carbon pricing can be less regressive than regulation-based policies.