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Carbon Taxation and Greenflation- Evidence from Europe and Canada

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Abstract

This paper studies the effects of carbon pricing on inflation dynamics. We construct a sample of carbon taxes implemented in Europe and Canada over three decades and estimate the response of inflation and price components to carbon pricing. Our empirical results suggest that carbon taxes did not significantly increase inflation, with dynamic effects estimated around zero in most specifications. Instead we find support for relative price changes, increasing the cost of energy but leaving the price of other goods and services unaffected. This is consistent with previous findings on the limited aggregate economic costs of carbon taxes. Based on the cross-section of taxes in Europe, we provide suggestive evidence that the response of inflation was especially muted in countries with revenue-neutral carbon taxes and autonomous central banks that can accommodate potential inflationary pressure associated with carbon pricing.

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  • Maximilian Konradt & Beatrice Weder di Mauro, 2021. "Carbon Taxation and Greenflation- Evidence from Europe and Canada," IHEID Working Papers 17-2021, Economics Section, The Graduate Institute of International Studies, revised 25 Dec 2022.
    • Handle: RePEc:gii:giihei:heidwp17-2021
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    7. Beat Hintermann & Maja Zarkovic, 2020. "Carbon Pricing in Switzerland: A Fusion of Taxes, Command-and-Control, and Permit Markets," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 18(01), pages 35-41, April.
    8. Jennifer Winter, 2020. "Carbon Pricing in a Federal State: The Case of Canada," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 18(01), pages 13-19, April.
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    Cited by:

    1. Herwig Immervoll & Cathal O’Donoghue & Jules Linden & Denisa Sologon, 2023. "Who pays for higher carbon prices?: Illustration for Lithuania and a research agenda," OECD Social, Employment and Migration Working Papers 283, OECD Publishing.
    2. repec:bny:wpaper:0112 is not listed on IDEAS
    3. Olovsson, Conny & Vestin, David, 2023. "Greenflation?," Working Paper Series 420, Sveriges Riksbank (Central Bank of Sweden), revised 01 May 2023.
    4. Schroeder, Christofer & Stracca, Livio, 2023. "Pollution havens? Carbon taxes, globalization, and the geography of emissions," Working Paper Series 2862, European Central Bank.

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    More about this item

    Keywords

    Climate policy; Carbon taxes; Carbon pricing; Inflation; Monetary policy; Climate change;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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