Carbon Pricing and Inflation Volatility

Carbon pricing initiatives, in the form of carbon taxes or emission trading systems ETSs), have proliferated in the last to decades, providing an opportunity to better understand their economic consequences. This paper assesses the effects of carbon pricing initiatives on inflation volatility. We find evi dence of ETS schemes inducing larger volatility in consumer price inflation, while no significant impact is found in the case of carbon taxes. This effect feeds through the energy component, which tends to be more closely related to carbon pricing, while it affects core inflation with some delay, suggesting indirect effects of ETSs on inflation. Finally, we explore several mechanisms contributing to the increase in the volatility of inflation, such as the volatility of underlying carbon prices, the sectoral coverage of these initiatives, the relevance of high polluting sectors in the productive structure, or the role of free emission allowances in ETS schemes.