In the face of accelerating climate change, balancing growth, environmental sustainability, and social equity remains a key challenge for policymakers. This paper leverages an agent-based model with sectoral production, emissions, and spatial-social dynamics to evaluate carbon taxes and investment subsidies, including targeted policy variants, in an emerging economy (Brazil). We examine their effects on emissions across sectors, economic performance, and social equity, focusing on how such policies influence firms’ innovation decisions—specifically, whether to adopt cleaner production methods that reduce input use and emissions. Simulation results show distinct outcomes: while the subsidy scenario on its own has little economic impact but can stimulate innovation, the carbon tax yields significant environmental gains at the cost of economic losses. Moreover, the combined policy produces outcomes very similar to the carbon tax scenario, underscoring a critical insight: short-term emission reductions arise primarily from output contraction. This suggests that, for a policy mix to succeed, subsidies must be designed not only to incentivize sustainable investment but also to act as a targeted compensatory mechanism that mitigates the economic costs of taxation. Finally, we examine targeted extensions of the core scenarios, focusing on sector-specific subsidies and the redistributive recycling of carbon tax revenues, finding evidence to support positive results for both policies.
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