Lunch Seminar: The Heterogeneous Impact of the Energy Transition

Abstract: The energy transition is inflationary in the short run and potentially deflationary in the long run, with non-neutral effects across generations. This paper develops a climate overlapping generations (OLG) model that extends Diamond (1965) to a dual-sector economy with a brown (fossil-fuel) sector and a green (renewable energy) sector. A carbon tax drives the reallocation of capital and labour toward the more capital-intensive green sector, while a convex damage function maps accumulated atmospheric carbon into output losses. This damage channel simultaneously reduces wages and returns to capital, generating a feedback mechanism that raises the optimal Pigouvian tax over time. The transition is inflationary in the short to medium run, as the tax passes through into brown-sector prices, and becomes deflationary in the long run as green total factor productivity increases through learning by doing. On distributional grounds, the carbon tax disproportionately burdens older cohorts through a savings-erosion channel, while younger cohorts experience a wage loss but benefit from future reductions in climate damages. A revenue-neutral recycling rule that allocates more than half of tax revenues to the old cohort equalises welfare losses across generations. We also derive a Green Golden Rule showing that correcting both environmental and intergenerational inefficiencies requires combining carbon taxation with an explicit transfer mechanism.