The Unequal Economic Consequences of Carbon Pricing

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. (JEL E23, E24, O44, Q41, Q54, Q55, Q58)