Carbon Prices and Inflation in the Euro Area

Maximilian Konradt, Thomas McGregor and Frederik Toscani

No 2024/031, IMF Working Papers from International Monetary Fund

Abstract: What is the effect of carbon pricing on inflation? This paper shows empirically that the consequences of the European Union’s Emission Trading System (ETS) and national carbon taxation on inflation have been limited in the euro area, so far. This result is supported by analysis based on a panel local projections approach, as well as event studies based on individual countries. Our estimates suggest that carbon taxes raised the price of energy but had limited effects on overall consumer prices. Since future climate policy will need to be much more ambitious compared to what has been observed so far, including the need for larger increases in carbon prices, possible non-linearities might make extrapolating from historical results difficult. We thus also use input-output tables to simulate the mechanical effect of a carbon tax consistent with the EU’s ‘Fit-for-55’ commitments on inflation. The required increase of effective carbon prices from around 40 Euro per ton of CO2 in 2021 to around 150 Euro by 2030 could raise annual euro area inflation by between 0.2 and 0.4 percentage points. It is worth noting that the energy price increases caused by the rise in the effective carbon price to 150 Euro is substantially smaller than the energy price spike seen in 2022 following the invasion of Ukraine.

Keywords: Green transition; carbon taxes; climate policy; inflation; energy price spike; EU ETS price; European Union's Emission Trading System; headline inflation; EU ETS; price level; Carbon tax; Greenhouse gas emissions; Consumer prices; Europe; Global (search for similar items in EconPapers)
Pages: 41
Date: 2024-02-16
New Economics Papers: this item is included in nep-cis, nep-eec, nep-ene, nep-env and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=544465 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2024/031

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().