of the policy interventions differ in counterfactual scenarios of a fully credible commitment to net zero, an improved rule of law, and facilitated access to green bank finance.

We address these research questions using an empirical dynamic stochastic open-economy macro framework similar to the European Commission’s _E-QUEST_ model presented by Varga et al. (2022) but shifts the focus on an emerging-market context.<sup>2</sup> The model is designed for data-driven policy analysis and the simulation of low-carbon transitions. Renewable and fossil public investment can go into energy production or infrastructure. Infrastructure improves the marginal product of private capital but only up to a satiation point. To allow the model to capture deep transformations such as the low-carbon transition, it includes two critical features: a _learning-by-doing externality_ in the generation of renewable energy (Mercure 2012, Rubin et al. 2015); and the distinction between _short- and long-term elasticities of substitution between renewable and fossil energy_ (Guerrieri et al. 2008). On the labor market, the model allows for the possibility of _dis-equilibrium unemployment_ at the steady state, which provides flexibility regarding model closures and minimizes the impact of theory on the results for the long run.<sup>3</sup> The model features various financial instruments, bank lending constraints, and a financial accelerator mechanism along the lines of Kiyotaki and Moore (1997). The interested reader is referred to Appendix A, which presents the details of the model. We fit the model to Turkish data using standard Bayesian techniques as outlined in Herbst and Schorfheide (2015). The dataset covers the period from 2000Q2 to 2022Q3 and includes 31 time series in mixed frequency. Appendix B reports the details of the model estimation. We run all estimations and simulations in _Dynare_ 5.3 (Adjemian et al. 2022).

The simulation results suggest that T ̈urkiye needs to employ a dynamic policy mix to achieve the steady decline of 12 million (mn) tonnes of CO2 emissions per year required for net zero by 2053 while observing the following constraints: (a) keeping sovereign debt at 34% of trend GDP, (b) fully compensating low-income households for consumption lost relative to BAU, (c) public financing of necessary infrastructure investments which amounts to an average of 2 billion (bn) of 2015 USD ($) per year (World Bank 2022), and (d) buying up private stranded assets.

Under these constraints and the phase-out of fossil subsidies and public investment, our results suggest that T ̈urkiye should kick off the decarbonization of its economy with a carbon or fuel tax reaching $70 per tonne of CO2 by 2027. By then, public debt will be stabilized at the desired level. The carbon tax will then generate excess revenues that can be recycled as renewable energy subsidies to minimize the rise in energy prices. Renewable subsidies of up $1400 per tonne of oil equivalent (toe) trigger a renewable energy boom reinforced by endogenous productivity gains from scaling up renewable generation. As fossil energy

> 2Our modeling framwork also connects us to the literature on optimal environmental policy in a general equilibrium setting (Fischer and Springborn 2011, Annicchiarico and Di Dio 2015, Dissou and Karnizova 2016, van der Ploeg and Rezai 2021).

> 3Dis-equilibrium unemployment is known, among many others, from Dynamic Stochastic Dis-Equilibrium models (Schoder 2017, 2020) as well as dis-equilibrium theory (Barro and Grossman 1971, Chiarella et al. 2005).

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