The Unassuming Economist

From a paper by Michael D. Bauer, Diego R. Känzig, and Glenn D. Rudebusch:

“Putting a price on carbon emissions helps mitigate climate change but may also raise overall price
inflation. Using high-frequency event studies based on regulatory news in the European carbon market,
we show that carbon price surprises generate significant increases not only in energy futures prices,
but also in inflation swap prices and breakeven inflation rates. These measures of market-based
inflation expectations respond positively at both short and long horizons, with significant effects up to
ten years out. Such long-lived inflationary consequences of climate policy are relevant for central
banks. However, despite the sustained increases in market-based inflation expectations, forwardlooking
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.”