The Unequal Economic Consequences of Carbon Pricing

Abstract

This paper studies the economic impacts of carbon pricing. Exploiting institutional features of the European carbon market and high-frequency data, I document that a tighter carbon pricing regime leads to higher energy prices, lower emissions and more green innovation. This comes at the cost of a fall in economic activity, which is borne unequally across society: poorer households lower their consumption significantly while richer households are less affected. The poor are more exposed because of their higher energy share and, importantly, also experience a larger fall in income. Targeted fiscal policy can help alleviate these costs while maintaining emission reductions.

Keywords: Carbon pricing, cap and trade, emissions, macroeconomic effects, inequality, high-frequency identification

JEL Classification: E32, E62, H23, Q54, Q58