Climate change mitigation and green energy investment: A stock-flow consistent model

This paper develops a stock-flow consistent business cycle model integrating aggregate demand dynamics, income distribution, and ecological constraints to analyze climate mitigation strategies. We propose a two-sector framework distinguishing between energy and non-energy production. The model comprises wage and rent-earning households, firms in energy and non-energy sectors, a central bank, and commercial banks. Throughout the business cycle, energy sector firms gradually increase their share of green energy investment in the face of the low-carbon transition, replacing brown technologies with green alternatives. Through numerical simulations, we show that the pace of the energy transition influences both economic outcomes and emission trajectories. A negative shock to the green energy investment share – caused e.g. by policy inaction – not only slows the low-carbon transition but also depresses aggregate demand, wages, and employment. The paper examines possibilities for reducing the carbon intensity of production and provides insights into the interactions between ecological, macroeconomic, and distributive factors during the transition to a green economy.