CATALIST: A new, bigger, better model for evaluating climate change transition risks at Banco de España

This paper introduces CATALIST, a production network model developed to evaluate the economic effects of energy transition risks. Building upon Aguilar, González and Hurtado (2022) and Izquierdo, Moral-Benito, Prades and Quintana (2023), CATALIST incorporates a multi-country setting and an investment network and models greenhouse gas emissions and carbon taxes. The model places special emphasis on energy inputs by accounting for renewables and energy commodities and by differentiating their use from other intermediates in production and final consumption. Our findings reveal substantial heterogeneity in the impact of regulatory shocks relating to emissions across sectors and under different schemes. Specifically, a shock to the price of emissions and an expansion of the ETS system yield similar aggregate impacts, but the latter results in greater electrification, which can be further accelerated with increased renewable energy capacity. We also find that the aggregate impact is significantly influenced by how the additional revenues from carbon taxes are utilized, with recycling through a reduction in labor taxes proving more beneficial than through lump-sum transfers. Finally, while some sectors may respond to regulatory shocks with notable declines in investment, our simulations indicate a low risk of stranded assets, at least for shocks of a size compatible with the current medium-term emissions targets.