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 identify carbon policy shocks and trace their dynamic effects.A restrictive carbon policy shock raises energy prices, reduces emissions, spurs green innovation, but decreases economic activity-disproportionately burdening poorer households.Not only are the poor more affected because of their higher energy spending, but they also experience larger income losses.These indirect, general-equilibrium effects via income and employment play an important role in the transmission of carbon pricing policies, accounting for about two-thirds of the aggregate consumption response.

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