Carbon pricing and inflation volatility

Daniel Santabárbara and Marta Suárez-Varela

No 2231, Working Papers from Banco de España

Abstract: Carbon pricing initiatives, designed to increase the relative prices of greenhouse gas-intensive goods and services, could not only push up CPI inflation but also affect its volatility. Existing empirical literature has only found that carbon pricing schemes are generally associated to a transitory effect on the level of inflation. This paper assesses empirically the effects of carbon pricing on inflation volatility for both carbon tax and cap-and-trade schemes (also known as emission trading systems). Our work finds strong evidence that cap-and-trade schemes are associated with larger volatility in CPI headline inflation, while no significant effect is found in the case of carbon taxes. This effect seems to feed only through the energy component, and does not seem to affect the volatility of core inflation. In addition, we find that under cap-and-trade schemes, both the increase in the underlying price of emissions and the expansion in the activities covered by these initiatives are associated with greater inflation volatility. These findings have important policy implications, given that inflation volatility could complicate the conduct of monetary policy. Since the ambition to mitigate climate change in the years to come is expected to be implemented through broader coverage of carbon pricing, central banks should monitor those developments closely.

Keywords: carbon pricing; emission trading systems; carbon tax; inflation; inflation volatility (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 Q48 Q58 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-09
New Economics Papers: this item is included in nep-des, nep-ene, nep-env, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2231

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