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Climate Policy and the Economy: Evidence from Europe's Carbon Pricing Initiatives

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  • Diego R. Känzig
  • Maximilian Konradt

Abstract

This paper investigates the impact of carbon pricing on the economy, with a focus on European carbon taxes and the carbon market. Our analysis reveals three key findings. First, while both policies have successfully reduced emissions, the economic costs of the European carbon market are larger than for national carbon taxes. Second, we explore four factors that explain this difference: fiscal policy and revenue recycling, pass-through and sectoral coverage, spillovers and leakage, and monetary policy. Our findings suggest that all four factors play a significant role. Third, we document substantial regional heterogeneity in the impacts of the carbon market, which crucially depend on the share of freely allocated emission permits and the degree of market concentration in the power sector.

Suggested Citation

  • Diego R. Känzig & Maximilian Konradt, 2023. "Climate Policy and the Economy: Evidence from Europe's Carbon Pricing Initiatives," NBER Working Papers 31260, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31260
    Note: EEE EFG ME
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    Cited by:

    1. Bastianin, Andrea & Mirto, Elisabetta & Qin, Yan & Rossini, Luca, 2024. "What drives the European carbon market? Macroeconomic factors and forecasts," FEEM Working Papers 339740, Fondazione Eni Enrico Mattei (FEEM).
    2. Sandra Batten & Stephen Millard, 2024. "Energy and Climate Policy in a DSGE Model of the United Kingdom," National Institute of Economic and Social Research (NIESR) Discussion Papers 553, National Institute of Economic and Social Research.
    3. Akin A. Cilekoglu, 2024. "“Emissions and Allowances in the EU Emissions Trading System after the Paris Agreement”," AQR Working Papers 202401, University of Barcelona, Regional Quantitative Analysis Group, revised Feb 2024.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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