Maximilian Konradt and Diego R. Känzig's paper investigates the impact of carbon pricing on the economy, with a focus on European carbon taxes and the carbon market. Their analysis reveals three key findings. First, while both policies have successfully reduced emissions, the economic costs of the European carbon market are larger than for national carbon taxes. Second, they explore four factors that explain this difference: fiscal policy and revenue recycling, pass-through and sectoral coverage, spillovers and leakage, and monetary policy. Their findings suggest that all four factors play a significant role. Third, they document substantial regional heterogeneity in the impacts of the carbon market, which crucially depend on the share of freely allocated emission permits and the degree of market concentration in the power sector.

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