The geographic effects of carbon pricing

Abstract

This paper studies the heterogeneous impacts of carbon pricing on European regions. I follow the approach of Känzig (2023) and identify carbon policy shocks from changes in carbon futures price around regulatory events. The shock series is then combined with granular data on economic activity at the city- and county-level in Europe. I document that poorer regions are significantly more exposed to these shocks. Two years after a carbon policy shock, the output of regions in the bottom quartile of the gross value added per capita distribution decreases 0.4 percentage points more relative to the output of regions in the top quartile. I investigate which channels might explain this result and find that the most important driver is across- rather than within-country variation. The empirical evidence provided strongly encourages better coordination among European countries to avoid the economic costs of carbon pricing being unequally borne.