Macroeconomic policies for rapid decarbonization, steady economic transition and employment creation

A large number of countries have by now pledged to undertake policies aimed at reducing greenhouse gas emissions and achieving carbon neutrality in the coming decades. However, evidence on the suitable policy package to induce an effective and orderly transition is scarce. Recent studies suggest that abrupt and aggressive climate policy may induce macroeconomic frictions. We extend a macro-financial agent-based integrated assessment model to test a variety of policy packages aimed at rapidly decarbonizing the global economy, guaranteeing macroeconomic stability, and fostering job creation. We show that carbon taxation alone is self-defeating: its role at internalizing environmental costs and triggering rapid decarbonization finds little support. However, an ensemble of industrial regulations and public subsidies coupled with a mild carbon tax is the most promising policy toolkit to support a rapid and orderly transition. Such a policy mix can be designed to have a neutral impact on public finances.