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### Key question and approach
- Focus: whether carbon pricing affects inflation in the euro area.
- Three complementary analyses:
  - Empirical estimation using panel local projections with fixed effects and macro controls.
  - Two country-level event studies (Finland 2011, France 2014) with counterfactual economies via synthetic control.
  - Mechanical simulations based on detailed input-output tables consistent with the EU’s “Fit-for-55” goals.

### Major empirical findings (panel local projections and impulse responses)
- Overall conclusion:
  - Carbon taxes have not contributed meaningfully to inflation in the euro area during the period of analysis; where they have, the impact is likely short-lived.
  - Carbon pricing changes relative prices by raising the cost of energy, without a significant overall increase in the prices of goods and services.
- Dynamic impulse responses (shock standardized to 30 euro per ton; sample EA19, various specifications):
  - Estimated immediate impact on inflation: 0.3 percentage points on impact and peaks at around 0.45 percentage points after three years (imprecisely estimated; 90 percent confidence bands mostly include zero).
  - Example reported: a carbon tax increase of 30 euro per ton implies a temporary 0.1 percentage point increase in headline inflation after two years that fades out immediately (alternative specification).
  - Core inflation: muted and close to zero in all years following a tax change; error bands generally include zero.
  - Energy inflation: more sizable initial increase (example: 0.25 percentage points under a 30 Euro per ton change), but not statistically significant and the response fades and may turn negative in subsequent years.
- Price-level (HICP) effects:
  - Inflation increases by around 0.15 percentage points after two years, before declining to zero (possibly even negative).
  - Combined upward impact on the overall HICP price level of around 0.3 percentage points after three years, before fading out.
- Statistical/sample notes:
  - Cross-country panel: annual data for 19 euro area countries, 2000–2020, total of 285 observations (other referenced samples report EA19, 2000-2019).
  - Identification: panel local projections with country fixed effects; controls include GDP growth, share of CO2 emissions in GDP, weighted changes in energy prices, euro area GDP growth, and policy rate in levels. Four annual lags of each variable included.
  - Standard errors clustered by country; 68 and 90 percent confidence bands reported.

### Country case studies (synthetic control)
- Finland (2011 tax revision):
  - Carbon tax change: from 26 to 65 Euro per ton in one year.
  - Result: Finnish HICP exceeds synthetic counterfactual by about 2 percentage points about two years after the tax change; gap closes after four years and is within confidence bands five years after the tax change.
  - Donor countries used: Malta, Luxembourg, Slovakia, Netherlands; RMSPE 0.35.
- France (2014 enactment and increases):
  - Carbon tax path: started at 7 Euro in 2014 and increased linearly to about 45 Euro per ton by 2018.
  - Result: French HICP exceeds counterfactual by about 0.5 percentage point at four years and about 1 percentage point at five years after enactment; difference within error bands until four years.
  - Donor countries used: Germany, Cyprus, Greece; RMSPE 0.33.
- Aggregate event-study takeaway:
  - Consumer prices grew slightly faster in treated cases relative to counterfactuals but the difference is small over a five-year horizon: 0.15 percentage points per year (example summary).
  - Results sensitive to treatment date choice (announcement vs enactment).

### Mechanical simulations (Fit-for-55 consistent carbon price path, 2022–2030)
- Carbon price path assumptions:
  - Baseline calibration: linear increase in effective carbon prices to 150 Euro per ton of CO2 by 2030.
  - Alternative description: euro area effective carbon price starts at 38 Euro per ton at the euro area level in 2021, implying an annual increase of around 12 Euro per ton between 2021 and 2030.
  - Figure/text annotations also reference a 112 Euro/ton increase by the year 2030 (implied increase over 2021–2030).
- Pass-through and firm adjustment assumptions:
  - Baseline pass-through from producer to consumer prices: 75%.
  - Additional scenarios: full pass-through (100%) and 50% pass-through.
  - Firm-side energy-demand adjustments allowed using empirically estimated elasticities.
- Energy-demand elasticities (contemporaneous elasticities of emissions to carbon pricing used for firm adjustments):
  - Coal: - 0.24 percentage points.
  - Electricity: - 0.17 percentage points.
  - Natural gas: -0.27 percentage points.
  - Crude oil and refined petroleum: 0.001 percentage points.
- Simulation results (aggregate euro area, consumption-weighted, 2022–2030):
  - Carbon tax increases consumer prices by 0.2 to 0.4 percentage points annually at the euro area level, depending on pass-through and demand adjustments.
  - By 2030 cumulative effect on consumer prices ranges between 1.8 and 3.7 percentage points across scenarios.
  - Baseline (75% pass-through): annual increase in consumer prices about a third of a percentage point; cumulative level effect of 2.7 percentage points by 2030.
  - Alternative cumulative outcomes reported in annex/panels: cumulative effects of up to 2.6 percentage points in related studies; central ranges reported as 1.8–3.7 and baseline 2.7 percentage points.
- Comparison to 2022 energy shock (illustrative numbers):
  - Observed (January to August 2022, Germany futures): diesel rose from 2.70 Euro per liter to 4.18 Euro (55 percent), electricity from 150 Euro per mwh to 571 Euro (280 percent).
  - A carbon price increase of 112 Euro/ton in early 2022 would have mechanically doubled the price of coal, but increased diesel and electricity by 11 and 17 percent respectively.
  - With the actual highest ETS price in 2022 around 90 Euro per ton, the contribution of carbon prices to the diesel and electricity spikes was smaller still, not more than around 5 percentage points of the total observed increases.

### Cross-country heterogeneity and state-dependent effects
- Drivers of heterogeneity:
  - Energy intensity and energy mix of production, reliance on coal and oil, initial level of carbon pricing, and HICP weights for energy consumption.
  - Examples: effective taxes between 31 Euro per ton in Germany and 58 in Finland; energy intensity of electricity between 0.6kg per kwh in Estonia and 0.06kg per kwh in France and Luxembourg; HICP energy weight as high as 15 percent in Slovakia, 6.6 percent in Malta.
- Quantified country impacts (assuming 75% pass-through):
  - Impact on inflation varies from less than 1percentage point in Luxembourg to over 5percentage points in Lithuania, Estonia, and Greece.
- State-dependent findings:
  - Price level increases more when inflation is highly persistent, though differences are not statistically significant in reported panels.
  - When output gap is positive there is a somewhat positive impact on prices; when output gap is negative there is no impact.

### Robustness, limitations, and methodological notes
- Data and coverage:
  - Cross-country panel: annual data for 19 euro area countries, 2000–2020, total of 285 observations (other referenced sample windows include 2000–2019).
  - Carbon pricing metric combines national carbon taxes and EU ETS price adjusted for country-level coverage; possible overlap between national carbon taxes and ETS may lead to some double counting.
- Identification and controls:
  - Panel local projections with country fixed effects; controls include GDP growth, share of CO2 emissions in GDP, weighted changes in energy prices, euro area GDP growth, policy rate in levels; four annual lags included.
  - Additional robustness controls tested: fiscal stance and tax revenue share, environmental regulation, 10-year bond yield, year fixed effects, squared effective carbon tax, interaction with share of non-renewables.
  - Robustness outcomes: baseline results remain largely unchanged; effects on inflation become slightly larger and more precisely estimated but remain temporary.
- Input-output simulation caveats:
  - Sectoral input-output tables (GTAP) mapped to HICP sectors account for 70 percent of HICP; approach abstracts from long-run behavioral responses and technological change, allowing limited firm-side substitution.
  - Results conditional on pass-through assumptions, demand adjustments, and chosen carbon price path.
- General caveats:
  - Historical carbon taxes have generally been limited in scope and ambition; empirical results may not be robust to very large future shocks.
  - ETS revenues tend to be less recyclable than broader carbon taxation revenues due to volatility and remit fragmentation.

### Comparison with related evidence and policy implications
- Consistency with literature:
  - Empirical literature largely finds limited macroeconomic and inflationary effects of carbon pricing in advanced economies; cited model-based estimates show somewhat larger but broadly comparable effects.
  - Examples: McKibbin et al. (2014) reported a flat 15 USD per ton carbon tax in the US raises headline inflation by 0.8 percent in the first year; IMF October 2022 WEO Chapter 3 reported modest effects on euro area inflation between 0.2 and 0.4 percentage points by 2030.
- Policy-relevant conclusions:
  - The mechanical inflationary impact of ambitious carbon price increases consistent with Fit‑for‑55 is modest at the aggregate euro area level (0.2–0.4 percentage points annually over 2022-2030 under simulated scenarios).
  - Country heterogeneity implies potential for inflation divergence across euro area members, which could complicate ECB monetary policy.
  - Revenue recycling and complementary non-price policies materially affect macroeconomic impacts; timing climate policies during a normalization phase of energy prices could reduce near-term inflationary pressures.
  - Longer-term dynamics: climate policies can spur technological change and economies of scale in low-carbon technologies, possibly generating deflationary pressures over the longer horizon.

*International Monetary Fund — Executive Summary of "The Green Transition and Inflation in the Euro Area" (content unit: wpiea2024031-print-pdf).*

### Executive Summary ......................................................................................................

### Executive Summary

### Major themes and structure
- I. Introduction
- Related Literature
- II. Three Decades of Carbon Pricing in the euro area
  - National carbon pricing
  - Emissions Trading Scheme (ETS)
- III. Data and Empirical Strategy
  - Data
  - Empirical Strategy
- IV. Aggregate Results
  - National Carbon Taxes
  - Combined Impact of National Carbon Taxes and the ETS
  - Robustness
  - Cross-country heterogeneity
- V. Case Studies
- VI. Looking Ahead: Mechanical Effects of Future Climate Policy on Consumer Prices
- VII. Conclusions
- References
- Annex I. Additional Tables and Figures
- Annex II. GTAP to HICP matching

### Empirical materials and visualizations (figures)
- Figure 1. ETS Free Allowances and Surrendered Units, 2005–21
- Figure 2. National Carbon Taxes in the EA, 1990–2019
- Figure 3. EU ETS Price and Coverages, 2005–19
- Figure 4. Dynamic Impulse Responses of Inflation (in p.p.) to National Carbon Taxes
- Figure 5. Dynamic Impulse Responses of Inflation (in p.p.) to National Carbon Taxes and ETS
- Figure 6. Dynamic Impulse Responses of Price Level (in p.p.), to National Carbon Taxes and ETS
- Figure 7. Robustness Tests
- Figure 8. Impact of Carbon Taxes on Price Level Conditional on Macroeconomic Environment
- Figure 9. Event Studies
- Figure 10. Carbon Price Path Under Fit-for-55
- Figure 11. Cumulative Effects of Carbon Tax on Consumer Prices, Euro Area

### Tabular resources
- Table 1. National Carbon Taxes
- Table 2. Energy Inputs, Carbon Intensities and Prices, 2021

### Intended empirical focus (as indicated by section headings and figures)
- Historical overview of carbon pricing instruments in the euro area over multiple decades, including national carbon taxes and the EU Emissions Trading Scheme (ETS).
- Data compilation and empirical strategy for estimating effects of carbon pricing on inflation and price levels.
- Aggregate empirical results separately for national carbon taxes and for the combined impact of national carbon taxes and the ETS.
- Robustness checks and exploration of cross-country heterogeneity.
- Case studies illustrating mechanisms or country-specific dynamics.
- Forward-looking analysis of the mechanical effects of future climate policy (including a Fit-for-55 carbon price path) on consumer prices.
- Annex materials providing additional tables/figures and mapping from GTAP to HICP.

*Source: wpiea2024031-print-pdf - Executive Summary (IMF).*

### Executive Summary

### Executive Summary

### Key question and approach
- Focus: whether carbon pricing affects inflation in the euro area.
- Three complementary analyses:
  - Empirical estimation using panel local projections with fixed effects and macro controls.
  - Two country-level event studies (Finland 2011, France 2014) with counterfactual economies.
  - Mechanical simulations based on detailed input-output tables consistent with the EU’s “Fit-for-55” goals.

### Main empirical findings (panel local projections)
- Overall conclusion: carbon taxes have not contributed meaningfully to inflation in the euro area during the period of analysis; where they have, the impact is likely short-lived.
- Carbon pricing changes relative prices by raising the cost of energy, without a significant overall increase in the prices of goods and services.
- Dynamic impulse responses:
  - Headline inflation: small and temporary impacts; estimated around zero after five years. Example: a carbon tax increase of 30 euro per ton implies a temporary 0.1 percentage point increase in headline inflation after two years that fades out immediately.
  - Core inflation: muted and close to zero in all years following a tax change; error bands generally include zero.
  - Energy inflation: more sizable initial increase (example: 0.25 percentage points under a 30 Euro per ton change), but not statistically significant and the response fades and may turn negative in subsequent years.
- Level effects:
  - The overall consumer price level is not affected meaningfully after five years.
  - The price of energy shows an increase that is persistent over time.

### Country case studies (event studies)
- Cases: Finnish tax revision in 2011 and French carbon tax enactment in 2014.
- Method: construct counterfactual economies without the carbon tax and compare HICP evolution.
- Result: consumer prices grew slightly faster in these cases compared to counterfactuals, but the difference is small over a five-year horizon after the tax change: 0.15 percentage points per year.

### Simulation results (Fit-for-55 consistent path using input-output tables)
- Baseline calibration: linear increase in effective carbon prices to 150 Euro per ton of CO2 by 2030 (implying an increase of 112 Euro in the effective carbon price over the 2021-2030 period, slightly above 12 Euro per year).
- Quantitative implications for euro area consumer prices over 2022-2030:
  - Increase in overall consumer prices of between 0.2 and 0.4 percentage points annually at the euro area level, depending on pass-through and demand adjustments.
  - Baseline scenario: 75 percent pass-through to consumer prices and energy demand adjustments by firms estimated from the data yields a cumulative effect on consumer prices of 2.7 percentage points by 2030.
- Heterogeneity: cumulative effects vary widely across countries depending on energy intensity, energy mix, initial carbon taxation, and household preferences for energy-intensive goods and services.
- Comparison to 2022 energy shock: simulated increases in the price of fossil fuels and electricity from the carbon price path are significantly smaller than the observed 2022 increases driven by the war in Ukraine. Numerical example:
  - Observed (January to August 2022, Germany futures): diesel rose from 2.70 Euro per liter to 4.18 Euro (55 percent), electricity from 150 Euro per mwh to 571 Euro (280 percent).
  - A carbon price increase of 112 Euro/ton (toward a 150 Euro/ton level) in early 2022 would have mechanically doubled the price of coal, but increased diesel and electricity by 11 and 17 percent respectively. With the actual highest ETS price in 2022 around 90 Euro per ton (not 150 Euro), the contribution of carbon prices to the diesel and electricity spikes was smaller still, not more than around 5 percentage points of the total observed increases.

### Interpretation and mechanism
- Conceptual distinction from oil shocks:
  - Carbon taxes are often predictable and intended to be permanent, facilitating substitution toward less carbon-intensive goods and services and limiting broad price increases.
  - Carbon pricing changes relative prices (energy vs non-energy) rather than driving aggregate inflation.
- Revenue recycling and non-pricing policies can materially affect macroeconomic impacts; ETS revenues tend to be less recyclable than broader carbon taxation revenues for reasons noted (volatile revenues and sectoral ministry remit).
- Potential longer-term dynamics:
  - Climate policies can spur technological change and economies of scale in low-carbon technologies, possibly generating deflationary pressures over the longer horizon as unit costs decline. Short-run inflationary impacts of carbon pricing may be counteracted by longer-term cost declines from technological change.

### Robustness, limitations, and scope
- Data and coverage:
  - Cross-country panel: annual data for 19 euro area countries, 2000–2020, total of 285 observations.
  - Carbon pricing metric combines national carbon taxes and EU ETS price adjusted for country-level coverage.
- Identification and controls:
  - Panel local projections with country fixed effects; controls include GDP growth, share of CO2 emissions in GDP, weighted changes in energy prices, euro area GDP growth, and policy rate in levels. Four annual lags of each variable included.
  - Standard errors clustered by country.
- Caveats:
  - Historical carbon taxes have generally been limited in scope and ambition; empirical results may not be robust to the size of future shocks, motivating the simulation exercise for out-of-sample scenarios.
  - Possible overlap between national carbon taxes and ETS in some instances may lead to some double counting in the effective carbon price metric.
  - Results are conditional on the specified pass-through assumptions, demand adjustments, and the particular carbon price path used in simulations.

### Comparison with related evidence
- Empirical literature largely finds limited macroeconomic and inflationary effects of carbon pricing in advanced economies; consistent references include Metcalf and Stock (2020), Konradt and Weder di Mauro (2023), Känzig (2022) (with somewhat larger effects for exogenous ETS shocks), and micro-level studies indicating substitution and limited pass-through.
- Model-based CGE and macro models produce somewhat larger but broadly comparable effects; cited model-based estimates include:
  - McKibbin et al. (2014): flat 15 USD per ton carbon tax in the US raises headline inflation by 0.8 percent in the first year.
  - IMF October 2022 WEO Chapter 3: modest effects on euro area inflation, between 0.2 and 0.4 percentage points by 2030, similar to the present simulations.
  - Other country-specific simulations for Austria and Germany show modest simulated inflation effects in the same neighborhood.

*International Monetary Fund — Executive Summary of "The Green Transition and Inflation in the Euro Area"*

### 0.3 percentage points on impact and peaks at around 0.45 percentage points after three years although

### wpiea2024031-print-pdf - 0.3 percentage points on impact and peaks at around 0.45 percentage points after three years although

### Key empirical findings on carbon pricing and inflation
- Dynamic responses (local projections, sample EA19, 2000-2019; shock standardized to 30 euro per ton):
  - Estimated immediate impact on inflation: 0.3 percentage points on impact and peaks at around 0.45 percentage points after three years (imprecisely estimated; 90 percent confidence bands mostly include zero).
  - Carbon taxes have a positive, but imprecisely estimated, effect on energy prices and headline consumer prices.
  - Core prices show an absent response, suggesting upward pressure is largely confined to energy and not transmitted to other goods and services.
  - Interpretation: carbon taxes change relative prices (increasing energy prices for some years) while leaving aggregate prices largely unchanged.
- Price-level effects (including robustness checks):
  - Inflation increases by around 0.15 percentage points after two years, before declining to zero (possibly even negative).
  - Combined upward impact on the overall HICP price level of around 0.3 percentage points after three years, before fading out.
- Confidence and estimation notes:
  - 68 and 90 percent confidence bands reported; standard errors clustered by country.
  - Sample and specification: effective tax rate including national carbon taxes only; estimations in levels tested for stationarity with a simple test rejecting the null of a unit root when using country and time fixed effects.

### Robustness and specification checks
- Additional controls tested:
  - Fiscal stance and tax revenue share (to capture revenue recycling), environmental regulation, and the 10-year bond yield.
  - Specification replacing EU-level controls with time fixed effects.
  - Inclusion of the squared effective carbon tax to allow for non-linear effects.
  - Interaction of the effective tax rate with the share of non-renewables in a country’s energy mix.
- Robustness outcomes:
  - Baseline results remain largely unchanged.
  - Effects on inflation become slightly larger and more precisely estimated but remain temporary.
  - IRFs for headline inflation and the HICP price level, including all robustness checks, show inflation rising by around 0.15 percentage points after two years and HICP level up about 0.3 percentage points after three years.

### Cross-country heterogeneity and state-dependent effects
- State variables and construction:
  - Inflation persistence dummy: equals 1 if coefficient on lagged inflation (휌) from a Phillips-curve style regression exceeds 0.7 (inflation persistence constant over time by country).
  - Output gap dummy: equals 1 if the output gap is positive in a given year (varies by country and time).
- Summary statistics (Table 3):
  - Inflation persistence: Observations 288; Mean 0.437.
  - Output gap: Observations 342; Mean 0.439.
  - Inflation persistent countries identified: Austria, Belgium, Finland, Greece, Italy, Netherlands, Slovenia.
- Conditional responses (HICP price level):
  - Price level increases more when inflation is highly persistent (red vs blue lines), though differences are not statistically significant (Panel A).
  - When output gap is positive there is a somewhat positive impact on prices; when output gap is negative there is no impact (Panel B).

### Case studies (synthetic control method)
- Method: Synthetic control comparing treated country HICP to plausible counterfactuals using monthly seasonally adjusted HICP over a 5-year window around tax changes; donor pool restricted to euro area countries without a carbon tax in the 10-year event window.
- Finland (2011 tax revision):
  - Carbon tax change: from 26 to 65 Euro per ton in one year.
  - Result: Finnish HICP exceeds synthetic counterfactual by about 2 percentage points about two years after the tax change; gap closes after four years and is within confidence bands five years after the tax change.
  - Donor countries used: Malta, Luxembourg, Slovakia, Netherlands; RMSPE 0.35.
- France (2014 enactment and increases):
  - Carbon tax path: started at 7 Euro in 2014 and increased linearly to about 45 Euro per ton by 2018.
  - Result: French HICP exceeds counterfactual by about 0.5 percentage point at four years and about 1 percentage point at five years after enactment; difference within error bands until four years.
  - Donor countries used: Germany, Cyprus, Greece; RMSPE 0.33.
- Caveats:
  - Results are sensitive to treatment date choice (announcement vs enactment dates can change magnitude and sign).
  - Overall takeaway: measurable but modest aggregate effects on HICP even when carbon tax increases were large; evidence of an effect on the price level but overall lack of a persistent inflationary effect.

### Mechanical simulations of future carbon price paths (2022–2030)
- Framework and data:
  - Sectoral input-output tables (GTAP) for 65 sectors mapped to 55 HICP-relevant sectors (accounting for 70 percent of HICP).
  - Energy inputs: coal, electricity, natural gas, crude oil and refined petroleum and coke.
  - Energy carbon intensities from EEA and U.S. EIA (expressed in tCO2e/kwh); prices as of January 2022 (Euro/kwh); electricity prices for Germany.
  - Approach abstracts from long-run behavioral responses and technological change; allows limited firm-side energy substitution using empirically estimated elasticities.
- Estimated contemporaneous elasticities of emissions to carbon pricing (used to allow for firms’ energy-demand adjustments):
  - Coal: - 0.24 percentage points.
  - Electricity: - 0.17 percentage points.
  - Natural gas: -0.27 percentage points.
  - Crude oil and refined petroleum: 0.001 percentage points.
- Carbon price assumptions and paths:
  - Baseline assumption stated: a price of 150 Euro per ton by the year 2030 (aligned with Chapter 3 WEO baseline referenced in the text).
  - Contextual details in figures/text: euro area effective carbon price starts at 38 Euro per ton at the euro area level in 2021, implying an annual increase of around 12 Euro per ton between 2021 and 2030.
  - Figure annotations: Figure 10 note references 147 Euro/ton by 2030; scenario description in Figure 11 references a 112 Euro/ton increase by the year 2030.
- Pass-through assumptions:
  - Baseline pass-through from producer to consumer prices: 75%.
  - Additional scenarios: full pass-through and 50% pass-through also shown.
- Simulation results (aggregate euro area, consumption-weighted):
  - Carbon tax increases consumer prices by 0.2 to 0.4 percent per year, depending on pass-through.
  - By 2030 cumulative effect on consumer prices ranges between 1.8 and 3.7 percentage points.
  - Baseline (75% pass-through): annual increase in consumer prices about a third of a percentage point, cumulative level effect of 2.7 percentage points by 2030.
  - Euro area results obtained by aggregating country-level IOT outcomes using consumption weights.

*Italic: International Monetary Fund — MF WORKING PAPERS The Green Transition and Inflation in the Euro Area (content unit: wpiea2024031-print-pdf)*

### 0.1 and 0.2 percentage points annually, while the latter finds cumulative effects of up to 2.6 percentage points

### wpiea2024031-print-pdf - 0.1 and 0.2 percentage points annually, while the latter finds cumulative effects of up to 2.6 percentage points

### Empirical findings on carbon pricing and inflation
- Local projections and individual country event studies find little evidence that carbon pricing has contributed meaningfully to inflation over the sample period.
- Estimates from related studies cited:
  - Effects of "0.1 and 0.2 percentage points annually", while another study finds "cumulative effects of up to 2.6 percentage points over a 6 year span."
  - Delgado‑Tellez et al. (2022) find effects "between 0.15 and 0.4 percentage points annually" for the euro area under comparable scenarios.
- Interpretation: changes in carbon prices shift relative prices and raise the cost of energy, without affecting the prices of core goods and services.
- As of 2021, effective carbon prices in the euro area were "around one quarter of the level required by 2030" to meet the EU’s ‘Fit‑for‑55’ agenda.

### Cross‑country heterogeneity in inflation response
- Cross‑country variation in consumer price responses to carbon taxation is driven by:
  - Energy intensity and the energy mix of production (example: Estonia uses more energy in production than most other euro area countries).
  - Reliance on coal and oil in production (example: Greece more reliant on coal and oil; Estonian producers use a lot of oil, relative to other countries).
  - Initial level of carbon pricing: "effective taxes between 31 Euro per ton in Germany and 58 in Finland."
  - Energy intensity of electricity: "between 0.6kg per kwh in Estonia and 0.06kg per kwh in France and Luxembourg."
  - Consumer preferences for energy‑intensive goods and services: HICP basket weights for energy "as high as 15 percent in Slovakia, but only 6.6 percent in Malta."
- Quantified country impacts (assuming a pass‑through of 75%):
  - Impact on inflation varies from "less than 1percentage point in Luxembourg" to "over 5percentage points in Lithuania, Estonia, and Greece."
- Policy relevance: heterogeneous effects by country highlight a potentially important source of inflation divergence within the euro area and a challenge for ECB monetary policy.

### Simulation results and projections (Fit‑for‑55 scenario)
- Simulation setup:
  - Increase in carbon price from "around 40 Euro per ton of CO2 to 150 over the period 2021-2030."
  - Simulations based on detailed input‑output tables and varying pass‑through assumptions.
- Main euro area simulation outcome:
  - The above carbon price increase "increases consumer prices between 0.2 and 0.4 percentage points annually at the euro area level over 2022-2030, depending on the degree of pass-through."
- Additional simulation notes:
  - Scenario of a "112 Euro/ton increase by the year 2030" is used in some panels.
  - Results are shown for pass‑through rates including "100%", "75%", and "50%".
  - Robustness checks presented (e.g., without firm adjustment, without unmatched sectors, with crude oil carbon intensity, with increasing firm adjustment).
- Comparison to 2022 energy price spike:
  - Back‑of‑the‑envelope calculations show that, for most energy types, Fit‑for‑55 implied effects on energy prices are modest and "orders of magnitude smaller than what European countries experienced during 2022."
  - A normalization phase from high energy prices might offer an opportunity to enact ambitious climate policy while energy prices are falling.

### Methodology and robustness
- Empirical methods:
  - Local projections estimated on a cross‑country panel dataset (Sample EA19, 2000-2019) and individual country event studies.
  - Dynamic responses standardized to a 30 euro per ton shock in local projections figures.
  - Standard errors clustered by country; shaded bounds denote 68 and 90 percent confidence bands.
- Input‑output simulations:
  - Based on IOTs, carbon intensities, and 2021 prices; firm energy demand elasticities by energy type estimated from the data.
  - Euro area aggregation uses consumption weights.
- Annex materials and checks:
  - Figure A1: additional local projection results for headline inflation for EU ETS only and national carbon tax only (shock size standardized to 30 euro per ton).
  - Figure A2: robustness checks (year fixed effects, additional country controls, non‑linear effective carbon tax).
  - Figure A3: additional simulation results (panels A–D showing alternative assumptions on firm adjustment, sector matching, carbon intensity, and increasing firm adjustment).
  - Table A2: Energy Prices in 2022, Fit‑for‑55 implied prices (notes on data sources and carbon intensities).
  - Annex II: GTAP to HICP matching table for sector aggregation.

### Policy implications and conclusions
- Overall assessment: effects of carbon pricing on inflation have been modest to date and are broadly consistent with previous academic research.
- Key considerations for policymakers:
  - The mechanical inflationary impact of ambitious carbon price increases consistent with Fit‑for‑55 is modest at the aggregate euro area level (0.2–0.4 percentage points annually over 2022-2030 under simulated scenarios).
  - Country heterogeneity implies potential for inflation divergence across euro area members, which could complicate ECB monetary policy.
  - Carbon pricing is only one element of a broader policy mix; regulatory and non‑price measures will also affect outcomes.
  - Timing: pursuing climate policies during a normalization phase of energy prices might reduce near‑term inflationary pressures associated with the green transition.

*International Monetary Fund — MF WORKING PAPERS The Green Transition and Inflation in the Euro Area*

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_Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024031-print-pdf.pdf_