growth. This additional simulation highlights the importance of electricity tariffs in the decarbonization transition, since it requires the electrification of most of the economy.

**Crowding out:** The amount of investment required for the transition is large and there is no guarantee that it will be fully financed by increased domestic savings. Also, it is interesting to separate in the macroeconomic implications what arises from changes in technologies (e.g., higher energy efficiency) and from macroeconomic shifts (e.g., increase in investment vs. consumption). Therefore, we perform a sensitivity analysis by changing the assumption on how the investments are financed. In the baseline scenario, we assume that the additional investments needed for the green transition are exogenous and financed by an increase in domestic savings. In this scenario, we assume that investments are endogenous and that savings rates are fixed. Therefore, sectoral investment needs would be financed by domestic savings to the extent that public and private savings increase. Since private savings are a function of household and business incomes, which do not increase significantly or even decrease relative to the baseline, investment increases only to the extent that public savings increase due to increased government revenues from the carbon tax. The remaining funding required for sectoral investments would come _at the expense of investments in other sectors_ (e.g., investments in the electricity sector would reduce investments in other sectors, leading to a crowding out effect of public and private investments). This scenario represents a worst-case scenario in macroeconomic terms, where the decarbonization is done at the expense of economic-growth investments.

**Air pollution ‘co-benefits’** : A large literature suggests that reductions in air pollution increase labor productivity. We take this into account in the model by linking labor productivity to air pollution levels. The literature suggests that a 1 percent decrease in PM2.5 concentration would increase labor productivity by 0.3 percent (Jooste, Loch Temzelides, Sampi Bravo, & Dudu, 2022). In this scenario, we assume that this relationship is effective in both the baseline and the scenario. When mitigation policies reduce air pollution, labor productivity begins to increase relative to the baseline scenario. Note that the change in PM2.5 is estimated by the CGE, and not taken from the sectoral scenarios.

# 3.4 Results

Figure 5 shows that the RNZP scenario would contribute positively to Türkiye’s economic growth compared with the baseline and in spite of the large investment needs, especially co-benefits are taken into account and if labor market frictions can be reduced.

Improved energy efficiency in the transportation and building sectors through the decarbonization scenarios drive the growth benefits in the short and medium term. The growth benefits of the transition are enhanced by considering the indirect benefits of reduced air pollution or the removal of friction in labor markets, making it easier for people in the most affected sectors to find employment in expanding sectors such as renewable energy. The growth benefits of the transition depend critically on how the investments needed for the transition are financed. If the investments needed to implement mitigation measures divert funds from other investments (i.e., crowd out investments in the rest of the economy), the benefits are significantly reduced in the short to medium term and can become negative in the long term.

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