Climate Policies and Input Substitution over Time

This paper investigates quantitatively how the impact of climate policies such as a carbon tax differs over the short and the long run in the macroeconomy. We document limited possibilities to switch from fossil fuels to green alternatives over short time horizons. Over more extended periods, however, this substitutability increases significantly. The same pattern holds for aggregate energy in the production process so that the energy intensity of production can only decrease in the long run without limiting output. We then build a quantitative macroeconomic growth model that accounts for these patterns through a technology-choice channel. We find that, in order to achieve similar emission targets, carbon taxes should be increased by about 10% permanently compared to models that focus on the long-run only. Economic costs of doing so are relatively small, especially in the short run. Additionally, we find that, quantitatively, inter-fuel substitution possibilities are much less important than the economy’s overall energy intensity.

The Decline in Energy Intensity

Over the past 50 years, energy intensity—measured as the energy used per unit of value added—has decreased significantly in the U.S. This paper investigates the key factors behind this decline and explores whether the trend is likely to continue. The analysis reveals that, without sectoral shifts—particularly the move from industry to services—energy intensity would have declined by an additional three percent. Technological advancements account for more than half of the observed reduction in energy intensity. Additionally, the economy is increasingly shifting towards electrification. An accounting exercise modeling various energy types is performed to replicate the data, providing further insights into the role of different energy sources behind this trend.

Climate Risk: Transition or Physical?

This paper investigates the multifaceted nature of climate risk for firms, focusing on both direct physical and transition risks. This study analyzes over two decades of self-reported data from thousands of publicly traded U.S. companies, from 2002 to 2023 to develop a comprehensive Climate Risk Index (CRI) for a deeper understanding of how firms perceive climate-related risks. The findings indicate that transition risks are the primary drivers of climate risk for firms, followed by the direct impacts of climate change and spillover effects among industries. The energy sector is the most vulnerable sector, followed by agriculture, transportation, and real estate.