The EU’s Energy Transition
IMF Working Papers, March 9, 2026
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Bibliographic details
- Authors: Benjamin Carton, Geoffroy Dolphin, Romain A Duval, Andrew Hodge, Amit Kara, Simon Voigts, Sebastian Wende
- Published: March 9, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229040198.001
Overview
- The EU has ambitious goals for climate and energy security that may have large macroeconomic implications, with investment impacts particularly uncertain.
- Bottom-up approaches based on sectoral calculations point to investment increases of 2 to 3 percent of GDP annually.
- Top-down general equilibrium models often yield negligible aggregate investment effects.
- The investment and broader macroeconomic impacts depend on how carbon pricing revenues are recycled.
Methodology
- Uses a modeling technique that bridges bottom-up and top-down approaches.
- Extends a New Keynesian general equilibrium model (GMMET) to feature a detailed representation of energy use in key emitting sectors.
- Key sectors represented: buildings, transport, and energy-intensive manufacturing.
Key findings
- Simulations suggest that achieving the EU’s 2035 climate goals implies an increase in aggregate annual investment of just around 1 percent of GDP.
- The EU’s energy transition only has modest macroeconomic impacts if it combines carbon pricing and green subsidies, because:
- Green subsidies lower energy prices and inflation and raise output.
- Carbon pricing has opposite effects.
- Combining both yields small effects on energy prices, inflation, and output.
- The fiscal cost of the transition is modest provided decarbonization relies sufficiently on carbon pricing.
Fiscal and investment numbers
- Bottom-up sectoral estimates: 2 to 3 percent of GDP annually (investment increases).
- Model-based simulation: just around 1 percent of GDP (aggregate annual investment increase to meet 2035 climate goals).
- Revenues from ETS1 and ETS2 could eventually reach about 1 percent of GDP.
- Public investment cost of the transition is less than 0.5 percent of GDP annually.
- Net fiscal space exists that could be used for other policy objectives if decarbonization relies sufficiently on carbon pricing.
Policy implications and recommendations
- Combining carbon pricing and green subsidies can be complementary and deliver modest macroeconomic impacts; policy design should account for offsetting effects on prices, inflation, and output.
- Recycling carbon pricing revenues matters for investment and broader macroeconomic outcomes.
- Relying sufficiently on carbon pricing can keep public investment costs modest and create net fiscal space for other objectives.
Source: IMF Working Papers — "The EU’s Energy Transition", Benjamin Carton, Geoffroy Dolphin, Romain A Duval, Andrew Hodge, Amit Kara, Simon Voigts, and Sebastian Wende; Working Paper No. 2026/046 (March 9, 2026).
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