Taking the green pill: Macroeconomic and financial risks of the energy transition in the MATRIX model

This paper investigates the macro-financial risks of the energy transition using an extended MATRIX model, a multi-agent, multi-sector integrated assessment framework for the Euro Area. The model features endogenous, directed technical change in the energy sector and a decentralized electricity market operating under a merit-order rule. Energy firms switch technologies based on relative profitability, creating feedback loops between R&D, productivity, and competitiveness, that can lead to either a brown lock-in or a green energy transition. We compare conventional environmental policies, such as a brown tax on polluting firms’ profits, a carbon tax on emissions, and green subsidies — both unconditional and R&D-based — with alternative policy mixes, including coordinated monetary policy, green finance, and green industrial policy. Results show that conventional policies modestly increase the likelihood of a green transition, but entail significant GDP losses due to production and financial constraints. Green finance and industrial policy mitigate these costs by easing sectoral bottlenecks and fostering a more effective transition. Finally, the brown tax proves more effective than carbon tax, as polluting firms tend to pass carbon costs onto consumers, reducing its impact.