DP16396 Carbon Taxation and Greenflation: Evidence from Europe and Canada

Author(s): Maximilian Konradt, Beatrice Weder di Mauro
Publication Date: July 2021
Date Revised: March 2022
Keyword(s): Carbon Pricing, climate change, Co2 taxes, inflation, monetary policy
JEL(s): E31, E50, Q43, Q54
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16396

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 for the first time the response of inflation and price components to carbon pricing. We find that past carbon taxes changed relative prices but did not significantly increase inflation. This is consistent with previous findings of carbon taxes impacting emissions but not aggregate output. 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 recycling schemes and monetary policy regimes that can accommodate the carbon tax.