Carbon pricing policies trade-offs between environment and economics

Carbon pricing policy is crucial in combating climate change, reducing greenhouse gas emissions, and facilitating the transition towards a low-carbon society. However, stricter carbon pricing policies, while yielding environmental benefits, can also adversely impact economic activities. This study examines the economic consequences of carbon pricing policy shocks (CPPS) using high-frequency trading data from the Chinese carbon emissions trading market. This study employs a vector autoregressive model, using CPPS as an instrumental variable to isolate the causal effects of regulatory events. My findings indicate that as carbon pricing policies tighten, carbon emissions decrease, accompanied by an increase in green technology innovation and the adoption of electric vehicles. Nevertheless, these policy shocks also lead to a downturn in macroeconomic indicators, including increased unemployment rates and energy prices, as well as declines in GDP and industrial output. Furthermore, the economic consequences of carbon pricing are unevenly distributed across regions with different income levels, with lower-income groups being more severely affected than middle- and higher-income groups. Based on these insights, my study recommends implementing targeted fiscal support policies and ensuring long-term policy certainty to effectively reduce carbon emissions while mitigating issues of policy inequality