Too big to fail: implementing investments for the green transition in a holistic modelling approach

Abstract This study provides novel insights into the economic and emission-saving impacts of green investments using computable general equilibrium model MAGNET. MAGNET has been extended for assessing the economic and emission efficiency of green investments such as sector-specific investment allocation, investment risk premiums adjustment and technology learning effects to endogenize productivity growth in renewable and bioenergy sectors. In line with the proposals on climate neutrality and Green Deal, the study simulates an increase in investments in renewable energy and bioeconomy sectors (additional 15% replacement of capital stock). It is found that additional green investments bring positive GDP and emission-saving effects with cumulative multipliers of about 1.1 in the longer term for the aggregate EU. This study also explains through which channels the positive economic and emission effects occur in the economy. The green investment boost coupled with technology learning leads to substantial productivity increase in renewable and bioenergy sectors and replacement of labour by capital stock. Positive spillover effects in the rest of the economy result in higher demand for labour and growth of wages. The sensitivity analysis however shows that without additional funding, negative crowd-out effects occur in the economy, potentially also leading to negative food security effects via raising food prices. This supports the need for specific financial instruments to allow the financing of green transition.