What is the impact of carbon pricing on inflation in Austria?

Andreas Breitenfellner, Friedrich Fritzer (), Doris Prammer (), Fabio Rumler and Mirjam Salish ()
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Friedrich Fritzer: Oesterreichische Nationalbank, Economic Analysis Division, http://www.oenb.at
Doris Prammer: Oesterreichische Nationalbank
Mirjam Salish: Oesterreichische Nationalbank

Monetary Policy & the Economy, 2022, issue Q3/22, 23-41

Abstract: Tackling the climate crisis is one of the biggest challenges of our times with major repercussions for the macroeconomy. This study focuses on the impact of setting a price for carbon on consumer price inflation. Carbon pricing is a cost-effective means to reduce greenhouse gas emissions and incentivize sustainable behavior by increasing the prices of fossil fuels. To assess the related inflationary risk, we elaborate on two complementary (explicit) pricing approaches – carbon taxation and emissions trading – in the EU and in Austria. After teething problems, the emissions trading system launched by the EU in 2005 turned into an effective tool of decarbonization, with roughly 30% of EU-wide emissions cut by 2020 as emission allowance prices were raised over time. In Austria, rising allowance prices did not have a significant impact on inflation given the high share of renewable sources in power generation. With regard to the carbon tax that Austria will apply in the course of 2022 to sectors not covered by emissions trading, we estimate HICP inflation to go up by 0.1 to 0.2 percentage points annually until 2025, excluding indirect and second-round effects. Looking forward, trends in climate change and low-carbon transition may further impact inflation, its volatility and its distributional consequence and pose a challenge for monetary and other policies alike. This, however, should not detract from necessary climate protection in view of the consequences of unmitigated climate change on inflation and human activity at large.

Keywords: climate change; carbon pricing; inflation; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 H23 Q54 (search for similar items in EconPapers)
Date: 2022
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