Environmental Subsidies to Mitigate Net-Zero Transition Costs

Thu, 01 Jan 2026 00:00:00 +0000

This paper asks whether public subsidies to green-technology producers, financed by a carbon tax, can materially reduce the macroeconomic cost of reaching net-zero CO2 emissions by 2060. The motivation is a market-structure failure that standard environmental models ignore: the abatement goods sector is initially immature and highly concentrated, with 10 percent of firms capturing roughly 80 percent of operating revenue (Eurostat/Ecorys data). Under such conditions a carbon tax alone raises the cost of abatement inputs, depresses competition, and generates a deep and prolonged GDP recession — even if it achieves the emissions target. The paper shows that redirecting carbon tax revenues toward subsidizing this sector can substantially offset the recession.

Soft landing and inflation scares

Research Question

Why did the 2021–2023 US inflation surge end in a soft landing — disinflation without a major recession — while the Volcker disinflation of 1979–1987 required substantial output losses? And was the timing and strength of the Federal Reserve’s reaction to the inflation surge decisive in achieving this outcome?

Methodology and Model

The paper develops and estimates a micro-founded Heterogeneous-Expectation New Keynesian (HENK) model in which agents hold idiosyncratic, dispersed beliefs about the long-run (steady-state) level of inflation. The key departure from full-information rational expectations (FIRE) is that information about the long-run value of inflation is dispersed and sticky: agents update their beliefs through pairwise social learning (SL), adopting the forecasting model of the agent whose belief produced lower recent inflation forecast errors. This tournament process — inspired by genetic algorithms — generates a time-varying cross-sectional distribution of subjective inflation beliefs.

Gauthier Vermandel | Macro Paper Warehouse

Environmental Subsidies to Mitigate Net-Zero Transition Costs

Soft landing and inflation scares