We establish a two-sector model to simulate the potential effects of green fiscal
policies and unconventional green monetary policy on the economy during a recovery
or in case of a stimulus policy. We find that instruments such as carbon tax, implicit
tax on brown loans, and subsidy for the purchase of green goods are all found to be
beneficial to the green sector in contrast to green quantitative easing. The carbon tax
imposed directly on firms in the brown sector is the most efficient tool to reduce pollution.
More importantly, the marginal effects of green instruments on the economy
depend on consumer preferences. Namely, the marginal effects are the most prominent
when consumers start to develop the habit of purchasing green goods. Furthermore,
the effects of environmental policies are more efficient when the elasticity of substitution
between green and brown goods increases. This finding suggests that raising
consumers’ awareness and ability to consume green goods reinforce the efficiency of
public policies designed for low-carbon transition of the economy.