Beyond Green Preferences: Demand-side and Supply-side Drivers in the Low-Carbon Transition

Green preferences are often seen as crucial for mitigating climate change. Yet, it remains unclear whether they alone can drive the shift toward a low-carbon economy and what the distributional consequences might be. This paper studies the macroeconomic, environmental, and distributional effects of green preferences among consumers and producers using the agent-based integrated assessment MATRIX model. We compare scenarios with varying pro-environmental attitudes to conventional supply-side climate policies like carbon taxes and cap-and-trade mechanisms, with and without abatement investment subsidies and alternative redistribution strategies. Without an active policy, achieving a low-carbon transition requires unrealistically high values of green preferences among consumers and producers. Conversely, carbon taxes and cap-and-trade mechanisms can reach that objective, but at the cost of increased instability and inequality. Moderate abatement subsidies can balance those effects, reducing emissions while mitigating both economic and distributional challenges, especially when environmental revenues fund social transfers instead of tax cuts.