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Putting a price on carbon emissions helps mitigate climate change but may also raise overall price inflation—sometimes called
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Even a decade ahead, market participants do not view carbon policy shocks as temporary surprises, but as more persistent shifts in the inflationary environment.
Key facts
- The team thank Michael Kiley, Paula Patzelt, and Andrew Rosin for helpful comments and suggestions
- The Brookings Institution is committed to quality, independence, and impact
- Even a decade ahead, market participants do not view carbon policy shocks as temporary surprises, but as more persistent shifts in the inflationary environment
- Despite the sustained increases in market-based inflation expectations, forward-looking nominal interest rates show no meaningful response to the carbon policy shocks, suggesting that investors
Summary
Putting a price on carbon emissions helps mitigate climate change but may also raise overall price inflation—sometimes called “greenflation.” Using high-frequency event studies based on regulatory news in the European Emissions Trading System, one of the world’s largest carbon markets, the authors find that carbon price surprises—regulatory announcements that affect the future supply of emissions allowances—generate significant increases not only in energy futures prices, but also in inflation expectations (measured by inflation swap prices and breakeven inflation rates) across short- and long-term horizons. Despite the sustained increases in market-based inflation expectations, forward-looking nominal interest rates show no meaningful response to the carbon policy shocks, suggesting that investors do not anticipate that the European Central Bank will lean against the inflationary effects of higher carbon prices. The paper makes both methodological and empirical contributions to climate economics. Monica DiLeo, Glenn D. Acknowledgements and disclosures The team thank Michael Kiley, Paula Patzelt, and Andrew Rosin for helpful comments and suggestions.