Working Paper: CEPR ID: DP18312
Authors: Brendan Berthold; Ambrogio Cesabianchi; Federico Di Pace; Alex Haberis
Abstract: This paper investigates the economic effects of carbon pricing policies using a panel of countries that are members of the EU Emissions Trading System. Carbon pricing shocks lead, on average across countries, to a decline in economic activity, higher inflation, and tighter financial conditions. These average responses mask a large degree of heterogeneity: the effects are larger for higher carbon-emitting countries. To sharpen identification, we exploit granular firm-level data and document that firms with higher carbon emissions are the most responsive to carbon pricing shocks. We develop a theoretical model with green and brown firms that accounts for these empirical patterns and sheds light on the transmission mechanisms at play.
Keywords: Heterogeneity; Cointegrated Asset Prices
JEL Codes: E32; E50; E60; H23; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in carbon prices (Q31) | raised input costs for brown firms (D21) |
| raised input costs for brown firms (D21) | reduced output (E23) |
| reduced output (E23) | affected overall economic activity (F69) |
| higher CO2 emissions intensity (L94) | larger negative impacts on GDP (F69) |
| higher CO2 emissions intensity (L94) | greater decline in equity prices (G19) |
| carbon pricing shocks (F69) | economic activity (E20) |
| carbon pricing shocks (F69) | inflation (E31) |
| carbon pricing shocks (F69) | financial conditions (E66) |