From carbon policy to consumer prices: The economic impact of carbon caps in the Euro Area

Hugo Morão

Energy Economics, 2025, vol. 143, issue C

Abstract: This study quantifies the impact of European Union Emissions Trading System (EU ETS) on inflation and key macroeconomic variables in the Euro Area (EA). Using a structural vector autoregression (SVAR) model, the analysis reveals that stricter climate policies significantly affect industrial production, unemployment, and inflation in transportation, utilities, and food sectors. Furthermore, the post-2020 regulatory adjustments in emissions caps and allowances have contributed to recent consumer price increases, an effect amplified by the COVID-19 pandemic and geopolitical tensions. The findings suggest the European Commission underestimated the macroeconomic consequences of EU ETS Phase 4. This highlights the need for a more flexible climate policy approach that balances environmental goals with macroeconomic stability.

Keywords: Climate policy; Carbon credits; Emissions trading; Cap and trade; Euro Area; SVAR; Energy crisis (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 F18 Q54 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988324008843

DOI: 10.1016/j.eneco.2024.108175

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