consumption is reduced, the carbon tax will find it increasingly challenging to generate fiscal revenues. By 2037, debt stability will require the government to phase out renewable subsidies completely and adjust another instrument to keep public debt stable. In our simulation, government consumption declines by 1.8%-points of trend GDP between 2037 and 2053. Over the projection period, the government will also increase the required spending on renewable infrastructure and phase out investment in fossil energy production and infrastructure. Finally, transfer payments to low-income households increase by 1%-point of trend GDP over the projection period.

This policy package is projected to mobilize a considerable amount of green finance. Private investment in renewable energy increases from 0.2% of trend GDP in 2022 to almost 4% by 2053. Renewable energy consumption will increase from around 20 million toe in 2022 to 420 million by 2053. This is 460% higher than the baseline projection.

The projected impacts on GDP are moderate. During the fiscal consolidation phase, the carbon tax will briefly reduce GDP, peaking in 2027 with a GDP loss of 0.7% compared to the no-policy baseline. Between 2031 and 2037, GDP is projected to exceed the baseline slightly. By 2037, the declining government consumption will increasingly reduce GDP, reaching a projected loss of 1% compared to the baseline in 2053. Regarding welfare, lowincome households are broadly indifferent to the transition as long as they receive sufficient compensation for the consumption lost relative to the baseline. In contrast, high-income households considerably benefit from the transition as the renewable capital assets created translate into higher household wealth.

Despite the overall moderate GDP effects and positive welfare effects, there are transition risks: While the low-carbon transition eliminates the dependence on fossil fuel imports, core goods exports will decline by up to 11% compared to the baseline. Moreover, there is a manageable but non-negligible risk of fossil asset stranding. In our simulation, stranded assets amount to almost 0.1% of trend GDP in 2053. Delaying the transition until 2030 will considerably increase the risk of stranded assets: 0.65% of trend GDP in 2043.

Our simulations stress the positive role of complementary policy. Consistent with Nemet et al. (2017), Battiston et al. (2021), Diluiso et al. (2021), Campiglio et al. (2023), we show that transparent policy communication and a credible commitment to the net-zero agenda benefit the low-carbon transition. It allows the private sector to adjust ahead of time, reducing economic friction. A lack of commitment and the expectation of policy reversals make the transition considerably more costly. Moreover, we find that implementing institutional reforms that improve the rule of law and thereby reduce equity risk premia to the average of China, India, and South Africa drastically improve the macro-economic outlook of the low-carbon transition, with GDP peaking at 2.6% above the no-policy baseline. Finally, reforms that facilitate access to green finance boost renewable energy investment and generation. Overall, complementary structural reforms reduce the required climate-policy interventions and improve the macroeconomic consequences of the low-carbon transition.

The present paper seeks to contribute to the literature on the macroeconomic implications of climate-fiscal policy in an emerging-market context. World Bank (2022) estimates the ad4