The investment-to-capital ratio It is a function of previous investment decisions. In the long- ~~(~~ Kt−1 ~~)~~ run this ratio converges to long-term growth (TFP adjusted for the labor share in income plus growth in working-age population) and the capital depreciation rate. In the short-run, investments increase if the marginal product of capital (MPKt) is higher than the cost of capital (UCCt). The error term is independent and identically distributed (εt~i. i. d). Thus, any measure that raises expected growth in the long run will generate higher investment. The real cost of capital is a function of the short-term interest rate (proxied by the average interest rate on government debt B CIT (rt )) and adjusted for corporate income taxes (τt ):

**While public sector choices in the model are discretionary, private investment choices are behavioral based on firm-level optimization** . As a result, there are multiple ways of representing the increase in the private sector investments, and the policies or public interventions in place to incentivize those investments. Here, to explore the implication of higher investments, two scenarios are used with different (and contrasted) assumptions on how the private sector incentives generate the investment amounts:

1. **TFP Scenario.** An increase in total factor productivity (A) from FDI flows and investment climate reforms (these are taken as a given). In the TFP scenario, an improvement in productivity in infrastructure will generate the necessary investment amounts required to reduce emissions. The TFP boost need not come at an economic cost (i.e., better rule or law, better institutions, a reduction in entry barriers are not always expensive), even though it may also include investments. This efficiency boost will also lower marginal costs, which benefit producers directly, but also consumers through lower end-user prices. Higher aggregate demand (from investment, lower costs) will increase imports. However, note that this import rise is offset by a reduction in fuel imports due to the “efficiency” factor of the new investments.

2. **Fiscal incentive scenario.** Government transfers to the private sector, where transfers are financed by raising additional revenues through a carbon tax calibrated on the CGE simulations presented in the first section of this paper. The economic transmission mechanisms are different in the case of raising funds via a carbon tax and then transferring those revenues as a subsidy to the private sector. The carbon tax drives a wedge between fossil fuel and renewable energy demand. It is assumed that the carbon price is passed onto the end-user, which implies a rise in aggregate prices in the short run. The government collects revenues from the carbon, which is then transferred to the private sector via a subsidy in energy efficiency infrastructure investment. The subsidy lowers the cost of capital for this type of investment relative to the return to capital.

**Another important assumption concerns the productivity of the new investment.** The question is whether the investments necessary for the RNZP are producing economic value in addition to emissions reductions, or only emissions reductions. Some of these investments are additional because they correspond to an additional cost to produce the same service. For instance, buildings can be more expensive because of electrified heat and better insulation. But at the same

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