All of Scioteca
Communities & Collections By Issue Date Authors Titles Subjects Country / Region
Profiles
Our Authors
My Account
Login

Greenflation: The cost of the green transition in small open economies

We propose a new model of a small open economy with efficient energy use to investigate the inflationary dynamics along the green transition. The model incorporates the production of green energy that substitutes exogenous brown energy sources in energy production. Production is characterized by low substitutability between resource and traditional inputs that firms can alter through directed input-saving technical change. We study transitional dynamics induced by exogenous increases of brown energy prices and/or changes in the brown energy taxation; green subsidies and green public investment. Increases in brown energy prices and taxes decrease the usage of brown energy but do not expand significantly the green sector, they simply improve energy efficiency use, surging firm’s marginal costs leading to greenflation and output losses. Public investment and subsidies effectively increase the usage of green energy. Green investment expands output and reduces green energy prices as it increases the productivity of the green sector. Subsidies imply a slower transition with small output costs and elevated green energy prices. We discuss the fiscal costs and welfare implications of the transition using different welfare metrics.

Abstract

Description

Subject

Energía | Evaluación de impacto | Políticas públicas

País / Región

Chile

URI

https://scioteca.caf.com/handle/123456789/1994

Date

2022-12-28

Cite from this publication

Collections

6.1 Documentos de trabajo en investigación socioeconómica

Endorsement

Review

Supplemented By

Referenced By

Thumbnail Image

Files

Greenflation_The cost of the green transition in small open economies.pdf (1.3 MB)

Authors

Journal Title

Journal ISSN

Volume Title

Publisher

Related Items

Thumbnail Image
The Economic Effects of an Accelerated Electrification and Decarbonization Process in Latin America

This research analyzes the potential economic effects of accelerated electrification and decarbonization in selected Latin American countries. Using an economic equilibrium model, four scenarios were...

Thumbnail Image
Unlocking growth in a changing world. Innovation, Integration, and Formalization for Latin America and the Caribbean

This CAF report identifies chronic economic stagnation and low productivity as the fundamental obstacles to development in Latin America and the Caribbean, highlighting that regional...

Thumbnail Image
Resilience with Efficiency: How Powershoring Can Contribute to the Decarbonization and Economic Development of Latin America and the Caribbean

The report analyzes the Powershoring strategy as a development opportunity for Latin America and the Caribbean, focusing on Brazil, Chile, Colombia, and Uruguay. The document...

Thumbnail Image
Sustainability Report 2025

In 2025, CAF consolidated its position as the leading bank for green, sustainable, and inclusive development in Latin America and the Caribbean. With credit approvals...

Thumbnail Image
2024 Sustainability Report

In 2024, CAF reaffirmed its commitment as the green and sustainable development bank for Latin America and the Caribbean. With 41% green financing, it surpassed...

Thumbnail Image
Public-infraestructure and energy-subsidy policies, energy access by the poor and long-term macroeconomic performance

This paper presents the main set-up and long-run results from a simple deterministic version of a dynamic stochastic general equilibrium model of a small open...