The macroeconomic effects of carbon pricing at a subnational level: evidence from California’s cap and trade

Tomás Baioni

Environmental Economics and Policy Studies, 2025, vol. 27, issue 2, No 7, 305-330

Abstract: Abstract This paper addresses the macroeconomic effects of subnational carbon pricing initiatives, fo- cusing on California’s cap and trade. Using high-frequency data and regulatory news, I construct a carbon policy surprise series to understand the aggregate effects of a carbon policy shock using impulse response functions from a SVAR model. Results on a monthly basis suggest that a shock tightening the carbon pricing regime leads to an immediate significant reduction in carbon emis- sions by 0.05%, albeit this reduction in emissions comes at the expense of an immediate temporary fall in economic activity by 0.01%. On the other hand, results suggest that increasing carbon prices do not transmit to either household energy prices or consumer prices. Likewise, estimations suggest that a positive shock to carbon prices decreases the monetary policy rate and increases unemploy- ment, albeit not statistically significant at the 10%. I resort to local projections as robustness checks and find that the prior conclusions hold, i.e., that the California’s cap and trade initiative has significant macroeconomic effects. I check as well my prior results on a weekly basis and find strong support of my initial results: higher carbon prices decrease California’s economic activity by 0.5% after 17 weeks (4 months).

Keywords: Carbon pricing; Macroeconomy; Impulse response functions; SVAR; Carbon policy surprises (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10018-024-00429-w

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