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This document studies the economic impacts of carbon pricing. It utilizes institutional features of the European carbon market and high-frequency data to identify carbon policy shocks and trace their dynamic effects. A restrictive carbon policy shock raises energy prices, reduces emissions, and spurs green innovation, but it decreases economic activity, disproportionately burdening poorer households. The poor are more affected due to their higher energy spending and experience larger income losses. These indirect general-equilibrium effects play a significant role in the transmission of carbon pricing policies, accounting for about two-thirds of the aggregate consumption response.

After

This document studies the economic impacts of carbon pricing. By exploiting institutional features of the European carbon market and high-frequency data, it identifies carbon policy shocks and traces their dynamic effects. A restrictive carbon policy shock raises energy prices, reduces emissions, and spurs green innovation, but decreases economic activity, disproportionately burdening poorer households. The poor are more affected due to their higher energy spending and experience larger income losses. These indirect general-equilibrium effects via income and employment play a significant role in the transmission of carbon pricing policies, accounting for about two-thirds of the aggregate consumption response.