Climate policy icons on wooden cubes
VoxEU Column Climate Change Europe's nations and regions

The effect of climate change on the Italian economy, part 2: Policy

EU countries have pledged to achieve net zero greenhouse gas emissions by 2050, but achieving this goal solely through market forces is unlikely. This second of two columns reporting results from a Bank of Italy research project examines crucial policies that are under public scrutiny. The findings reveal that policymakers can play a critical role in mitigating emissions and addressing the distributional consequences of doing so.

The Paris Agreement marked a significant milestone as EU countries committed to achieving net zero greenhouse gas (GHG) emissions by 2050, to have a chance at limiting temperature increases 1.5°C. Unlike the case of previous energy transitions, motivated by economic convenience and associated with increased consumption of (different) fossil fuels, achieving this target requires outright substitution of one energy source with another, and is motivated by concerns for future generations (IMF 2022). Market forces alone are unlikely to attain this goal, and it’s up to policymakers to provide strong economic disincentives to make fossil fuels less convenient and clean energy more accessible (e.g. van der Ploeg and Venables 2023).

Governments have implemented numerous policies to address this issue. Yet, their effectiveness in generating results and their cost-efficiency must both be evaluated to ensure that resources are used efficiently and policies are accepted by the public. To evaluate the causal impact of policies, economists have developed an important set of tools over the last 30 (or more) years. 1 Empirical results from these studies can then inform the design of the policies that will be implemented. For example, researchers may ask how many more solar panels would be installed if authorisation procedures were simplified, what the distributional consequences of a carbon tax would be under alternative tax-rebating mechanisms, by how much green investments would react to the availability of credit, or how would firms’ export performance change if carbon pricing was made more stringent. 2

In order to answer questions like these, the Italian central bank has recently promoted a research project entitled “The effects of climate change on the Italian economy”, bringing together economists from the Bank and researchers in geology, climatology, and economics from the academic world. 3 This column summarises some of the papers’ findings, with reference to measures that address the challenges arising from climate change. In a companion column, we discussed the results on the estimated damages that a changing climate will bring to the Italian economy (Alpino et al. 2023).

How to redistribute the revenues from a carbon tax?

According to both the academic literature (e.g. Conte et al. 2023) and policy institutions (IMF and OECD 2021) carbon taxation is an effective instrument to abate carbon emissions at the lowest cost (whichever is the preferred level of the tax). As a matter of fact, carbon taxes are not widely implemented due to a lack of political support (as discussed in Fabre and Douenne 2022). To make carbon taxes more appealing, policymakers may need to recycle the revenues generated by the tax in a way that mitigates the regressive effects of the measure. There are various options for doing this, including lump-sum untargeted transfers, reducing other distortionary taxes, and public investment. However, the impact of these policies on the distribution of tax burdens is complex and depends on a range of equilibrium adjustments. For instance, low-income households may be disproportionately impacted by carbon taxes as they spend a larger fraction of their income on taxed energy goods. Not only that; carbon taxes may also affect firms and workers in sectors that rely heavily on ‘dirty’ taxed inputs. These sectors may struggle to substitute ‘clean’ untaxed inputs and workers may face difficulty in relocating to other sectors, for example because of industry-specific human capital. In order to understand which rebating policy will achieve the largest welfare gains, one needs to understand the distribution of tax burdens in the population and how the chosen policy affects such burdens.

In a recent paper, Caprioli and Caracciolo (2022) analyse both short-term and long-term distributional effects of a hypothetical carbon tax of $75 per tonne of CO2eq in Italy and corresponding rebating measures. To do so, they built a general equilibrium model calibrated on Italian micro data. They find that in the long run (Figure 1), when workers can easily move between sectors, reducing distortionary labour taxes is the most effective revenue-recycling policy. This would decrease the deadweight losses associated to distortionary labour taxation and improve overall economic efficiency. However, in the short term, current workers may face difficulties transitioning to greener sectors. When workers are not able to move out of these sectors, the introduction of a carbon tax decreases sectoral wages, thus eroding the labour tax base. If the government faces an exogenous spending requirement, it may be unfeasible to reduce effective labour tax rates. Therefore, lump-sum transfers would be the best policy alternative for improving welfare in the short run. Indeed, lump-sum transfers discourage labour supply and mitigate the negative impact on sectoral wages, raising the tax base overall. The study concludes that redistributive policies can improve welfare, but that labour market frictions determine which policy is preferable.

Figure 1 Welfare effects from alternative tax rebating schemes

Figure 1 Welfare effects from alternative tax rebating schemes

Note: The figure shows the welfare effect – measured by the Consumption Equivalent Variation (CEV) in percentage terms – implied by each of the three rebating schemes considered for the five quintiles of the labour income distribution in the long run steady state. A positive (negative) CEV indicates a welfare loss (gain) relative to the initial steady state prevailing before the introduction of the carbon tax.

How effective are simplified authorisation procedures in promoting new solar panel installations?

When governments face challenges introducing carbon taxation, they often promote other policies that are of direct support to the development of green energy. Under certain conditions, direct subsidies to green energy may lead to an increase in emissions because subsidies, unlike taxes, increase overall energy demand (Hassler et al. 2021). On the other hand, there may be red-tape-related bottlenecks that slow down the development and adoption of renewables. This can be problematic, as several countries, including Italy, pursue targets on renewable energy penetration. More specifically, the Italian government aims to increase the share of energy generated from renewable sources by 20 percentage points by 2030, with photovoltaic (PV) energy being the primary contributor to this growth. However, the authorisation procedure required to build new photovoltaic plants in Italy is lengthy and burdensome, which has slowed progress. To address this issue, some Italian regions introduced regulatory simplifications between 2009 and 2013 for medium-sized plants (20-200 kW) by replacing the single authorisation procedure (AU) with a simplified authorisation procedure (PAS) that was less time-consuming and less expensive. As an example, at the beginning of 2008 it took nearly three years to obtain an AU in the region of Puglia to build a photovoltaic plant with an installed capacity above one megawatt (MW).

To evaluate the effectiveness of these regulatory simplifications, a recent study by Daniele et al. (2022) analysed administrative micro data on the location of Italian renewable energy plants. The authors compared the change in photovoltaic installations across neighbouring regions that did, and did not, implement the reform. Their analysis focuses on municipalities within 30 kilometres of the regional border, which ensures that the comparison is always between similar territories in terms of morphology and socio-economic characteristics (see the map in Figure 2). They found that the simplifications resulted in a 29% increase in installed capacity. Overall, the reform induced an extra 12 MW in capacity per quarter between 2009 and 2013, roughly 10% of that installed in medium-sized plants during that period. Further analyses suggest that these effects are truly additional: they are neither due to a pure ‘relocation’ effect across neighbouring regions, nor to a substitution of installations across affected and unaffected power capacity classes (e.g. from 20 to 19 kW).

Figure 2 Municipalities included in the estimation of the impact of a regulatory simplification episode in Lombardy

Figure 2 Municipalities included in the estimation of the impact of a regulatory simplification episode in Lombardy

Note: The source is Daniele et al. (2022).

Can the availability of credit supply increase green investments by firms?

Regulatory tools such as carbon pricing schemes, norms, and public investments in cleaner technologies set incentives for firms to reduce their carbon footprint. However, according to a recent survey (EIB 2022) financial constraints are a significant obstacle to sustainable investment for more than one quarter of European companies. In the presence of financial constraints, regulated firms may be forced to underinvest or sell brown assets rather than invst in cleaner capital (Nguyen and Phan 2022), or, even worse, trade off abatement costs against potential legal liabilities (Xu and Kim 2022). Understanding the depth and magnitude of financial constraints is important, especially as financial markets are showing pro-environmental preferences (Flammer 2021). Redirecting resources to firms that would otherwise implement inefficient decarbonisation can monetise these preferences.

Recent research by Accetturo et al. (2022a, 2022b) contributes to this topic by examining the effect of banks’ credit supply shocks on green investment decisions of Italian small and medium-sized enterprises (SMEs). Identifying the effect of credit supply is challenging, as green investments are difficult to detect from typical balance sheet data. To overcome this, the authors implement a textual analysis algorithm on supplementary notes to the financial statements of roughly 30,000 Italian SMEs. To identify the effect of credit supply, the paper uses data from all loans disbursed by banks operating in Italy to construct a firm-specific time-varying instrumental variable for credit availability.

The paper shows that green investments respond to the supply of credit in an economically significant way. The results indicate that a one standard deviation increase in credit supply raises the likelihood of undertaking a green investment by 1.9 to 3.4 percentage points, roughly equivalent to 14% of its standard deviation. In contrast, the authors find no statistically significant effect of credit supply shocks on the likelihood of overall capital investment (including non-green). The paper explores heterogeneity along several firm, industry, and location characteristics to understand the drivers of the positive elasticity of green investments to credit supply. The effect is concentrated among firms with high availability of internal capital, and in areas with higher preferences for environmental protection. This suggests both that green investment require combining external and internal financing and that subsidies can spur green investments if combined with environmental awareness.

Figure 3 Estimated effect of a one standard deviation increase in credit supply on green investment

Figure 3 Estimated effect of a one standard deviation increase in credit supply on green investment

Note: The source is Accetturo et al. (2022).

The study's findings have implications for policymakers, highlighting the importance of understanding the impact of financial constraints on firms’ investment decisions in the transition to a low-carbon economy.

Authors’ note: The views expressed in this column are those of the authors and do not necessarily reflect those of the institutions they belong to.


Accetturo, A, G Barboni, M Cascarano, E Garcia-Appendini and M Tomasi (2022a), “Credit supply and green investments”, Available at SSRN 4093925.

Accetturo, A, M Cascarano, G Barboni, E Garcia-Appendini and M Tomasi (2022b), “Credit supply and green investment”,, 1 December.

Alpino, M, L Citino, G de Blasio and F Zeni (2023), “The effect of climate change on the Italian economy, part 1: The damages”,, 10 April.

Caprioli, F and G Caracciolo (2022), “The distributional effects of carbon taxation in Italy”, mimeo.

Conte, B, K Desmet and E Rossi-Hansberg (2023), “Carbon taxes may be a boon for the world, even in the short run”,, 12 January.

Daniele, F, A Pasquini, S Clò and E Maltese (2022), “Unburdening regulation: the impact of regulatory simplification on photovoltaic adoption in Italy”, Bank of Italy Temi di Discussione (Working Paper) No 1387.

EIB (2021), “European firms and climate change 2020/2021”, European Investment Bank.

Fabre, A and T Douenne (2022), “Public support for carbon taxation: Lessons from France”,, 1 May.

Flammer, C (2021), "Corporate green bonds", Journal of Financial Economics 142(2): 499-516.

Hassler, J, P Krusell and C Olovsson (2021), “Presidential Address 2020 Suboptimal Climate Policy”, Journal of the European Economic Association 19(6): 2895-2928.

IMF (2022), “Energy transitions – we need much more than just solar and wind to achieve a clean energy transition”, Policy brief.

IMF and OECD (2021), “Tax policy and climate change. IMF/OECD report for the G20 finance ministers and central bank governors”.

Nguyen, J H and H V Phan (2020), "Carbon risk and corporate capital structure", Journal of Corporate Finance 64, 101713.

Pischke, J-S (2021), “Natural experiments in labour economics and beyond: The 2021 Nobel laureates David Card, Joshua Angrist, and Guido Imbens”,, 16 October.

Van der Ploeg, F and A Venables (2023), “Radical climate policies”,, 25 February.

Xu, Q and T Kim (2022), "Financial constraints and corporate environmental policies", The Review of Financial Studies 35(2): 576-635.


  1. This movement, labelled the ‘credibility revolution’ involves asking causal questions and use so called ‘natural experiments’ to construct reliable counterfactuals (see, for example, Pischke 2021).
  2. The same empirical methods can be used to study policies for adaptation to climate change. For example, researchers may ask whether farmers would carry out more defensive investments against extreme weather if more public subsidies were given out or whether there are frictions preventing those farmers to insure against such risk.
  3. The project benefited from the advice of Valentina Bosetti (Bocconi University), Giovanni Marin (University of Urbino), and Alessandro Palma (GSSI, L'Aquila).