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Carbon pricing, border adjustment and renewable energy investment: a network approach

Author

Listed:
  • Delgado-Téllez, Mar
  • Quintana, Javier
  • Santabárbara, Daniel

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. JEL Classification: C6, H2, Q5

Suggested Citation

  • Delgado-Téllez, Mar & Quintana, Javier & Santabárbara, Daniel, 2025. "Carbon pricing, border adjustment and renewable energy investment: a network approach," Working Paper Series 3020, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253020
    Note: 1488806
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    carbon border adjustment; carbon pricing; production networks; renewable energy investment;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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