Joint work with A. Cesa-Bianchi (Bank of England), F. di Pace (Bank of England), & A. Haberis (Bank of England).
Abstract: This paper explores both country and firm-level responses to carbon pricing shocks using a large panel of countries member of the EU Carbon ETS. We document that carbon pricing shocks have a limited average effect on real variables such as real GDP and consumer prices, while they coincide with significantly larger drop in equity prices and a tightening of financial conditions. At the same time, we document significant cross-country heterogeneity, suggesting that more energy intensive countries may suffer more than others. Using granular firm-level data, we document that firms with higher CO2 intensity tend to suffer more from carbon pricing policy shocks. At the same time, firms operating in browner sectors do not suffer more, thereby suggesting that investors’ funds reallocation tend to happen within, rather than across sectors. We develop a theoretical model that can account for these empirical patterns.
[Working Paper coming soon / draft available on demand]