What is the impact of the carbon pricing on inflation in the Euro area?

We analyze in this report the effects of carbon pricing on inflation in the euro area. The instruments of carbon pricing we consider are the national carbon taxes and the EU emissions trading system (ETS). The carbon tax sets a price per ton of CO2 emitted, while the ETS uses a market-based approach to impose a limit on the total quantity of CO2 emitted. We measure the impact of those two mechanisms on the average headline inflation in the euro area through an Ordinary Least Squares (OLS) model applied to panel data. Our panel is composed of 20 European countries over the period from 1996 to 2023. Our model results show a small contribution of carbon prices on inflation. From 1996 to 2017, we estimate 0.02 percentage points of the average headline inflation are explained by the carbon prices and 0.2 percentage points from 2018 to 2023. Based on projected carbon prices for 2030, 2040, and 2050, we expect that, all else being equal, carbon pricing would contribute between 0.3 and 0.4 percentage points to the average headline inflation rate of euro area countries .