Robust, empirical studies find that carbon taxes don’t lead to inflation.

Against the backdrop of the current debate on the economic effects of climate mitigation policies by market participants and central banks, this paper empirically assesses the response of inflation to carbon pricing. Does putting a price on carbon in fact lead to “greenflation”?

Our findings, drawing on 18 carbon taxes from Europe and Canada, cast doubt on the view that carbon taxation leads to inflation. Controlling for country and year fixed effects, as well as economic controls, we find no robust evidence of an inflationary response, on average. This result holds both for European countries and Canadian provinces, and survives a battery of robustness checks.

Moreover, we document that any inflationary effects associated with carbon taxation are confined to headline inflation, but do not spill over to core inflation. This finding is consistent with the idea that carbon taxes change relative prices, increasing the cost of energy, but do not lead to a broad increase in prices. Indeed, our estimates of the responses of energy and food inflation confirm this view.

Focusing on the cross-section of carbon taxes in Europe allows us to study heterogeneous effects depending on tax design and monetary policy independence. We find that the response of inflation to a similarly sized carbon tax shock is more muted in countries that recycle tax revenues and have independent central banks that can, in principle, respond to inflationary pressure.

When seen in conjunction with the prior literature on the limited economic effects of carbon taxes, our results imply that worries of drastic adverse economic consequences and “greenflation” might be overblown. Nonetheless, we acknowledge that future climate policy needs to be increasingly aggressive in order to reach the ambitious emission goals. Carbon taxes on the order of magnitude of tax rates in Scandinavia or Switzerland (exceeding $100 per ton of CO2 or more), with universal coverage potentially have broader economic effects than those documented in this paper.17