Regional Asymmetries in Output-Inflation Sacrifice of the Decarbonization Transition: State-Contingent Regimes of Climate Policy Shocks, Greenflation, and International Spillovers

Abstract

This study analyzes a multi-model structural and empirical framework to investigate the cross-border transmission channels, regime dependencies, and output-inflation trade-offs termed the output-inflation sacrifice arising from industrial supply chain decarbonization and transition-driven greenflation in a panel of 30 Asian countries. By integrating a Climate-Extended Global Vector Autoregression (C-GVAR), State-Dependent Panel Local Projections (SD-PLP), a Time-Varying Parameter VAR with Stochastic Volatility (TVP-VAR-SV), a Markov-Switching VAR (MS-VAR), and a micro-founded Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model, we trace the global propagation of carbon border policies and energy shocks across asymmetric regional nodes. Separate output and inflation models were analyzed under real GDP growth, core inflation, and producer price inflation.  The empirical results reveal that aggressive carbon pricing and critical mineral scarcity operate as intense upstream cost-push shocks, generating persistent greenflation within East Asian manufacturing hubs while subjecting Gulf oil-exporting economies to severe external demand destruction. The C-GVAR results showed that shocks originating in highly connected manufacturing hubs and carbon-policy-intensive trade blocs spill over into energy-importing and supply-chain-dependent economies. Localized projection and regime-switching matrices demonstrate that these output-inflation losses are highly state-contingent; transition-driven supply-side shocks nearly quadruple in magnitude when hitting the macroeconomy during periods of energy market crises or tight monetary conditions. The findings indicate that decarbonization shocks reduce output in the short run and raise inflation through cost-push channels. The rapid-transition regime produced a larger output loss than the gradual-transition regime, with the strongest contraction occurring within the first two to three quarters after the shock. Inflationary effects were also stronger and more persistent under rapid transition, particularly when carbon-price pressure coincided with energy-price volatility and critical-mineral bottlenecks. The MS-VAR and TVP-VAR-SV outputs confirmed nonlinear and time-varying transition effects, while the E-DSGE synthesis indicated that the welfare cost of transition falls substantially when revenue recycling, green-capital deepening and supply-chain diversification are introduced. Structural simulations from the E-DSGE framework also validate these empirical regularities, capturing an execution premium where front-loaded green capital reallocation causes short-run structural crowding-out but yields long-run mitigation of output losses. Remarkably, the model demonstrates that deploying an optimized fiscal-monetary mix specifically directing fifty percent of carbon revenue receipts into targeted production subsidies and regional tax adjustment rebates neutralizes imported carbon costs, dampens central bank Taylor-rule sensitivity, and compresses global welfare losses from -1.845% to -0.312%. Systemic robustness checks across alternative trade-financial configurations, smooth logistic transition grids, and Bayesian maximum likelihood re-estimations confirm that these multi-model parameter channels are structurally invariant, providing a mathematically unified policy design for securing macro-financial stabilization during the net-zero transition. The study concluded that rapid decarbonization is macroeconomically manageable only where sequencing, investment finance, mineral-security policy, and monetary-policy communication are coordinated.