Safeguarding macro-financial stability under carbon pricing and rapid energy transition

Key findings from this study

This research indicates that:

• rapid energy transitions driven by fast-growing carbon prices create significant unemployment, inflation, and income distribution pressures
• stabilization policies reduce but cannot fully eliminate macro-financial fluctuations under Paris-compatible scenarios
• coordinated fiscal and monetary policy designed specifically for decarbonization contexts can help mitigate macro-financial stability risks

Overview

This study integrates process-based energy system modeling with macro-financial agent-based simulation to assess macroeconomic and financial stability risks arising from rapid decarbonization driven by carbon pricing. The research couples the World Induced Technical Change Hybrid model with the Dystopian Schumpeter Meeting Keynes framework to translate energy sector transformations into business-cycle-frequency economic outcomes.

Methods and approach

The study soft-links an integrated assessment model tracking energy systems transformations with an agent-based model simulating macro-financial dynamics. This hybrid framework translates deep mitigation trajectories controlled by carbon pricing into macroeconomic and financial variables operating at business cycle frequencies.

Results

Rapid transitions induced by accelerating carbon prices generate substantial fluctuations in unemployment, inflation, and income distribution. Stabilization policies including fiscal and monetary interventions reduce these economic fluctuations but do not fully eliminate them under Paris-compatible decarbonization scenarios. The coupled modeling framework quantifies trade-offs between climate mitigation urgency and macro-financial stability, revealing that aggressive carbon pricing mechanisms create measurable economic instability even with policy intervention.

Implications

Carbon pricing mechanisms alone cannot ensure macro-financial stability during rapid energy transitions. Coordinated climate policy with targeted macroeconomic interventions becomes essential for managing the distributional and cyclical effects of decarbonization without destabilizing financial systems or labor markets. Model integration approaches linking sectoral transformations to economy-wide dynamics provide necessary infrastructure for policy design under deep mitigation pathways.

Scope and limitations

This summary is based on the study abstract and available metadata. It does not include a full analysis of the complete paper, supplementary materials, or underlying datasets unless explicitly stated. Findings should be interpreted in the context of the original publication.