Working Paper: CEPR ID: DP16396
Authors: Max Konradt; Beatrice Weder di Mauro
Abstract: This paper studies the effects of carbon pricing on inflation dynamics. We construct a sample of carbon taxes implemented in Europe and Canada over three decades and estimate the response of inflation and price components to carbon pricing. Our empirical results suggest that carbon taxes did not significantly increase inflation, with dynamic effects estimated around zero in most specifications. Instead we find support for relative price changes, increasing the cost of energy but leaving the price of other goods and services unaffected. This is consistent with previous findings on the limited aggregate economic costs of carbon taxes. Based on the cross-section of taxes in Europe, we provide suggestive evidence that the response of inflation was especially muted in countries with revenue-neutral carbon taxes and autonomous central banks that can accommodate potential inflationary pressure associated with carbon pricing.
Keywords: climate policy; carbon taxes; carbon pricing; inflation; monetary policy
JEL Codes: E31; E50; Q54; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon taxation (H23) | inflation (E31) |
| carbon taxes (H23) | aggregate inflation (E31) |
| carbon taxes (H23) | core inflation (E31) |
| carbon taxation (H23) | price of energy (Q41) |
| price of energy (Q41) | core inflation (E31) |
| carbon taxation without revenue recycling (H23) | inflationary effects (E31) |
| carbon taxation with revenue recycling (H23) | inflation response (E31) |
| carbon price shocks (E30) | inflation response (E31) |