This paper introduces a simple market equilibrium model to explore how policy measures targeting emission reductions impact prices (policy induced inflation). The model provides a quantification of the potential rise in inflation as a direct consequence of more ambitious environmental policies. We examine the trade-offs between environmental ambitions and economic stability, determining the extent to which inflation can be tolerated in the pursuit of enhanced environmental outcomes.
This is joint work with Maria Arduca (LUISS), René Aid (Paris Dauphine) and Luca Taschini (Edinburgh and the LSE).