Climate Change Mitigation: How Effective is Green Quantitative Easing

Abstract
We develop a two sector integrated assessment model with incomplete markets to analyze the effectiveness of green quantitative easing in complementing fiscal policies for climate change mitigation. We model green quantitative easing through a given outstanding stock of bonds held by a monetary authority and its portfolio allocation between a clean (green) and a dirty (brown) sector of production. Our key research question is whether the monetary authority can effectively contribute to a reduction of global damages caused by carbon emissions. Our findings show that green quantitative easing does not lead to a perfect crowding out of capital and thus has real effects in the long-run. Since it only indirectly affects the allocation of production to dirty and clean technologies and since its overall economic size is relatively small, green quantitative easing is, however, a less effective climate change mitigating policy instrument than are carbon taxes. Our analysis also suggests that green quantitative easing might be a quantitatively important complement to fiscal policies if governments only insufficiently coordinate on implementing green fiscal policies. Joint paper with Raphael Abiry, Marien Ferdinandusse, and Carolin Nerlich.

Keywords: Climate Change; Integrated Assessment Model; 2-Sector Model; Green Quantitative Easing; Carbon Taxation