Working Paper: NBER ID: w31260
Authors: Diego R. Knzig; Maximilian Konradt
Abstract: This paper investigates the impact of carbon pricing on the economy, with a focus on European carbon taxes and the carbon market. Our analysis reveals three key findings. First, while both policies have successfully reduced emissions, the economic costs of the European carbon market are larger than for national carbon taxes. Second, we explore four factors that explain this difference: fiscal policy and revenue recycling, pass-through and sectoral coverage, spillovers and leakage, and monetary policy. Our findings suggest that all four factors play a significant role. Third, we document substantial regional heterogeneity in the impacts of the carbon market, which crucially depend on the share of freely allocated emission permits and the degree of market concentration in the power sector.
Keywords: No keywords provided
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 |
|---|---|
| increase in EU ETS prices (P22) | rise in energy prices (Q41) |
| rise in energy prices (Q41) | fall in emissions (Q52) |
| EU ETS prices (P22) | fall in emissions (Q52) |
| EU ETS (Q58) | greater economic costs than national carbon taxes (H59) |
| EU ETS (Q58) | rising consumer prices (E31) |
| EU ETS (Q58) | falling GDP (E20) |
| EU ETS (Q58) | increasing unemployment (J64) |
| lack of direct redistribution in EU ETS (H23) | exacerbated economic impacts (F69) |
| sectoral coverage of policies (L52) | economic effects (F69) |
| share of freely allocated emission permits (Q58) | regional heterogeneity in economic impacts (R11) |
| market concentration in power sector (L94) | economic impacts (F69) |