co-authored with Max Massimiliano Croce, Nicolás Guiñez, Thien Nguyen and Claudio Tebaldi

ABTRACT

We propose a novel macrofinance model for a large economic area comprising climate damages, an Emission Trading System, and credit markets with (1) a bias for ‘net-zero’ brown firms, and (2) opaque voluntary carbon credit (VCC) markets. The implied allocation is far from the first-best. Welfare gains can be obtained in a setting in which private offsets are measured, verified, and tokenized into ‘green coins’ exchanged via a transparent ledger. Because of financing and fiscal frictions, this equilibrium is still inefficient. A central authority can obtain substantial additional welfare benefits by committing to a high average price for green coins through open market operations.

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