Carbon Taxation and Greenflation: Evidence From Europe and Canada

This paper studies the effects of carbon pricing on inflation dynamics. The authors construct a sample of carbon taxes implemented in Europe and Canada over three decades and estimate the response of inflation and price components to carbon pricing. The authors' empirical results suggest that carbon taxes did not significantly increase inflation, with dynamic effects estimated around zero in most specifications. Instead the authors find support for relative price changes, increasing the cost of energy but leaving the price of other goods and services unaffected. This is consistent with previous findings on the limited aggregate economic costs of carbon taxes. Based on the cross-section of taxes in Europe, the authors provide suggestive evidence that the response of inflation was especially muted in countries with revenue-neutral carbon taxes and autonomous central banks that can accommodate potential inflationary pressure associated with carbon pricing.