Regions that impose carbon pricing will make up for any initial macroeconomic losses over time, with the greatest positive environmental and economic effects accruing as the number of countries participating increases, a Bundesbank study released Tuesday found.
Welfare losses from carbon pricing would in the first instance be very high, with rising production costs and increasing prices likely to reduce demand and income, lower consumption and act as a strong disincentive to those regions with low relative per capita GDP.
“At the same time, emissions decline as a result of the increased carbon price. As a consequence, the economic damage diminishes, boosting productivity,” the authors conclude. “For wealthier regions, it may be advantageous to compensate poorer regions for participating.”