Working Paper: NBER ID: w31221
Authors: Diego R. Knzig
Abstract: This paper studies the economic impacts of carbon pricing. Exploiting institutional features of the European carbon market and high-frequency data, I document that a tighter carbon pricing regime leads to higher energy prices, lower emissions and more green innovation. This comes at the cost of a fall in economic activity, which is borne unequally across society: poorer households lower their consumption significantly while richer households are less affected. The poor are more exposed because of their higher energy share and, importantly, also experience a larger fall in income. Targeted fiscal policy can help alleviate these costs while maintaining emission reductions.
Keywords: carbon pricing; economic impacts; emissions; energy prices; distributional effects
JEL Codes: E32; E62; H23; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tightening of the carbon pricing regime (Q58) | increase in energy prices (Q41) |
| tightening of the carbon pricing regime (Q58) | decrease in overall greenhouse gas (GHG) emissions (Q54) |
| increase in energy prices (Q41) | decrease in economic activity (E32) |
| decrease in economic activity (E32) | lower output (E23) |
| decrease in economic activity (E32) | higher unemployment (J64) |
| tightening of the carbon pricing regime (Q58) | decrease in income (E25) |
| decrease in income (E25) | decrease in consumption (E21) |
| tightening of the carbon pricing regime (Q58) | greater income loss from employment in sectors more affected by carbon pricing (J39) |
| indirect effects (F69) | account for about two-thirds of the total effect on consumption (E20) |
| targeted fiscal policies (H30) | alleviate economic burdens on poorer households (H53) |
| targeted fiscal policies (H30) | maintain emission reductions (Q52) |