DP18312 The Heterogeneous Effects of Carbon Pricing: Macro and Micro Evidence
This paper investigates the economic effects of carbon pricing policies using a panel of countries that are members of the EU Emissions Trading System. Carbon pricing shocks lead, on average across countries, to a decline in economic activity, higher inflation, and tighter financial conditions. These average responses mask a large degree of heterogeneity: the effects are larger for higher carbon-emitting countries. To sharpen identification, we exploit granular firm-level data and document that firms with higher carbon emissions are the most responsive to carbon pricing shocks. We develop a theoretical model with green and brown firms that accounts for these empirical patterns and sheds light on the transmission mechanisms at play.