Emission impossible: Balancing Environmental Concerns and Inflation
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arXiv
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| Auteurs principaux: | , , , |
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| Format: | Preprint |
| Publié: |
2025
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| _version_ | 1866913668403298304 |
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| author | Aïd, René Arduca, Maria Biagini, Sara Taschini, Luca |
| author_facet | Aïd, René Arduca, Maria Biagini, Sara Taschini, Luca |
| contents | We provide a theoretical framework to examine how carbon pricing policies influence inflation and to estimate the policy-driven impact on goods prices from achieving net-zero emissions. Firms control emissions by adjusting production, abating, or purchasing permits, and these strategies determine emissions reductions that affect the consumer price index. We first examine an emissions-regulated economy, solving the market equilibrium under any dynamic allocation of allowances set by the regulator. Next, we analyze a regulator balancing emission reduction and inflation targets, identifying the optimal allocation when accounting for both environmental and inflationary concerns. By adjusting penalties for deviations from these targets, we demonstrate how regulatory priorities shape equilibrium outcomes. Under reasonable model parameterisation, even when considerable emphasis is placed on maintaining inflation at acceptable levels or grant lower priority to emissions reduction targets, the costs associated with emission deviations still exceed any savings from marginally lower inflation. Emission reduction goals should remain the primary focus for policymakers. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2501_16953 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Emission impossible: Balancing Environmental Concerns and Inflation Aïd, René Arduca, Maria Biagini, Sara Taschini, Luca General Economics Economics 91A65, 91B60, 91B70, 91B76, 49J50, 93E20 We provide a theoretical framework to examine how carbon pricing policies influence inflation and to estimate the policy-driven impact on goods prices from achieving net-zero emissions. Firms control emissions by adjusting production, abating, or purchasing permits, and these strategies determine emissions reductions that affect the consumer price index. We first examine an emissions-regulated economy, solving the market equilibrium under any dynamic allocation of allowances set by the regulator. Next, we analyze a regulator balancing emission reduction and inflation targets, identifying the optimal allocation when accounting for both environmental and inflationary concerns. By adjusting penalties for deviations from these targets, we demonstrate how regulatory priorities shape equilibrium outcomes. Under reasonable model parameterisation, even when considerable emphasis is placed on maintaining inflation at acceptable levels or grant lower priority to emissions reduction targets, the costs associated with emission deviations still exceed any savings from marginally lower inflation. Emission reduction goals should remain the primary focus for policymakers. |
| title | Emission impossible: Balancing Environmental Concerns and Inflation |
| topic | General Economics Economics 91A65, 91B60, 91B70, 91B76, 49J50, 93E20 |
| url | https://arxiv.org/abs/2501.16953 |