Carbon pricing and inflation expectations

Brookings Regulatory Policy

Published March 30th, 2026

Detected March 31st, 2026

Summary

Brookings Institution published research by Federal Reserve Bank of San Francisco and Northwestern University economists examining how carbon pricing policies affect household and market inflation expectations. The study provides empirical analysis of the relationship between carbon pricing mechanisms and broader economic expectations. This is academic research rather than regulatory policy with no compliance requirements.

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Brookings Institution published a research article on March 30, 2026 by Michael D. Bauer (Federal Reserve Bank of San Francisco), Diego R. Känzig (Northwestern University), and Glenn D. Rudebusch (Brookings) analyzing the impact of carbon pricing on inflation expectations. The paper examines empirical data on how carbon pricing mechanisms influence household and professional forecaster expectations about future inflation.

This publication is academic research with no compliance obligations or deadlines. It does not create new regulatory requirements for any party. The document is available as Working Paper WP106 and serves informational purposes for economists, policy analysts, and researchers studying the intersection of climate policy and monetary economics.

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Research

Carbon pricing and inflation expectations

Michael D. Bauer,

Michael D. Bauer Senior Research Advisor - Federal Reserve Bank of San Francisco Diego R. Känzig, and

Diego R. Känzig Assistant Professor, Department of Economics - Northwestern University Glenn D. Rudebusch

Glenn D. Rudebusch Nonresident Senior Fellow - Economic Studies, The Hutchins Center on Fiscal and Monetary Policy

March 30, 2026

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Climate & Energy Sub-Topics Climate Change Climate Policy

Monetary Policy U.S. Economy Sub-Topics Regulatory Policy

Program Economic Studies

Center The Hutchins Center on Fiscal and Monetary Policy

Putting a price on carbon emissions helps mitigate climate change but may also raise overall price inflation—sometimes called “greenflation.” Using high-frequency event studies based on regulatory news in the European Emissions Trading System, one of the world’s largest carbon markets, the authors find that carbon price surprises—regulatory announcements that affect the future supply of emissions allowances—generate significant increases not only in energy futures prices, but also in inflation expectations (measured by inflation swap prices and breakeven inflation rates) across short- and long-term horizons. Even a decade ahead, market participants do not view carbon policy shocks as temporary surprises, but as more persistent shifts in the inflationary environment. These findings contrast with previous literature which generally found only small or short-lived effects on inflation expectations.

Despite the sustained increases in market-based inflation expectations, forward-looking nominal interest rates show no meaningful response to the carbon policy shocks, suggesting that investors do not anticipate that the European Central Bank will lean against the inflationary effects of higher carbon prices. If greenflation is incorporated into longer-run inflation expectations, maintaining price stability becomes much more challenging for central banks. The results underscore the need for central banks to account for the expectations channel when assessing the macroeconomic trade-offs of climate policies.

The paper makes both methodological and empirical contributions to climate economics. On the methodological side, the authors implement high-frequency financial market event studies using a novel set of plausibly exogenous policy shocks. The paper is the first to apply this methodology to bond and derivative markets, estimating the term structure response of inflation and monetary policy expectations. On the empirical side, the paper provides new evidence of pass-through and spillover effects of carbon prices to energy markets, and of the wider impacts on expected inflation and interest rates.

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Authors

Michael D. Bauer Senior Research Advisor - Federal Reserve Bank of San Francisco @michaelbauer_hh

Diego R. Känzig Assistant Professor, Department of Economics - Northwestern University

Glenn D. Rudebusch Nonresident Senior Fellow - Economic Studies, The Hutchins Center on Fiscal and Monetary Policy