Firm structure, labour markets, and the green energy transition in low-income economies

Zambia, an economy heavily reliant on hydropower for electricity, has faced sustained disruptions to electricity generation amid increasingly frequent and severe droughts. These drought-related disruptions have caused large GDP losses in recent years and have tilted electricity generation towards polluting sources, putting the green transition at risk. Current policy proposals aim to dramatically expand the share of electricity from solar. We study the impact of the green transition amid disruptions to hydropower electricity generation on firm structure, labour, and macroeconomic outcomes in Zambia. We build a macro model with urban salaried firms and self-employed firms, rural self-employed firms, endogenous electricity adoption by firms, and an electricity sector with endogenous production categories. Electricity producers can choose one of three production technologies meant to represent coal, hydro, and solar, and that differ in their carbon-emissions generation, cost structure, and productivity. Calibrating the model to replicate the most recent GDP losses stemming from drought-driven hydro-power disruptions in Zambia, we find that subsidizing the adoption of solar electricity to meet the country's target for solar-electricity shares in 2030 can significantly offset the GDP damages and limit the rise in self-employment due to exogenous disruptions to hydro production. However, these subsidies alone lead to a sharp increase in emissions as greater solar adoption cannot fully offset the decline in hydro. Combining a policy-driven expansion in solar adoption with policies that reduce the incentive to adopt polluting sources of electricity, such as carbon taxes, can deliver non-trivial GDP gains and an expansion in solar without leading to an increase in carbon emissions.