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

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  • Morão, Hugo

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.

Suggested Citation

  • Morão, Hugo, 2025. "From carbon policy to consumer prices: The economic impact of carbon caps in the Euro Area," Energy Economics, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988324008843
    DOI: 10.1016/j.eneco.2024.108175
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    Cited by:

    1. Morão, Hugo, 2025. "Fuel price surges and rising inflation expectations in the Euro Area," International Economics, Elsevier, vol. 181(C).
    2. Morão, Hugo, 2025. "The macroeconomic effects of climate policy uncertainty: Evidence from Portugal," The Journal of Economic Asymmetries, Elsevier, vol. 32(C).
    3. Hung, Shih-Wei, 2025. "Is Investor Anxiety Attributable to Carbon Emissions Trading and Inflation?," Finance Research Letters, Elsevier, vol. 85(PD).
    4. Duan, Mengmeng & Wang, Mei & Zhou, Xianyang & Zhou, Dequn & Wu, Fei, 2025. "Synergy between emissions trading system and low-carbon consumption awareness: A multi-agent simulation analysis," Energy Economics, Elsevier, vol. 151(C).

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F18 - International Economics - - Trade - - - Trade and Environment
    • 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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