Navigating the carbon price shock: Electricity costs and employment reallocation in Europe

Investments in renewable energy and carbon taxes aim to combat global warming but could significantly raise electricity prices, adversely affecting manufacturing employment. Analyzing over 200,000 firms, we find that the likelihood of job losses or reallocation increases with reliance on electricity as a production input, affecting regions such as Southern Germany and Northern Italy most. Financially constrained firms are particularly vulnerable, suggesting a role for monetary policy in mitigating the adverse employment effects of higher carbon prices. Fiscal strategies should carefully balance environmental objectives and equitable labor market outcomes, given the benefits of renewable energy and the need to shift employment not only across sectors but also between regions. Such a balanced approach is essential to limit the long-term distributional impacts of higher electricity prices caused by the “carbon shock,” i.e. a carbon-policy-driven price increase.