Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322030 
Year of Publication: 
2025
Series/Report no.: 
ECB Working Paper No. 3020
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
An increase of e100 per tonne in the EU carbon price reduces the carbon footprint but lowers GDP due to higher energy costs and carbon leakage. Using a dynamic multi-sector, multi-country model augmented with an energy block that includes endogenous renewable energy investment, we analyze the macroeconomic and emissions effects of a carbon price. Investment in renewable energy mitigates electricity price increases in the medium term, leading to a smaller GDP loss (up to -0.4%) and a larger emissions reduction (24%) in the EU. Neglecting renewable energy investment overestimates the negative economic impact. We also find that a Carbon Border Adjustment Mechanism (CBAM) reduces carbon leakage but slightly hurts GDP and inflation as the competitive gain is offset by the higher costs of imported intermediate inputs.
Subjects: 
carbon pricing
renewable energy investment
carbon border adjustment
production networks
JEL: 
C6
H2
Q5
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-7112-6
Document Type: 
Working Paper

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