Carbon taxes and oil prices: driving inflation up or down?

Abstract

The world economy in general develops at a high rate, but it is accompanied by severe environmental consequences, which is one of the major problems for countries and policymakers in the process of finding appropriate solutions to deal with, especially in the context that nations around the world are currently suffering from great pressure on inflation due to the COVID-19 pandemic's lasting effects and economic instability caused by conflicts and intense political fluctuations. We consider that carbon tax is the macro factor that contributes to the change in inflation rate. Therefore, this paper estimates and explores the influence of the carbon taxes on inflation along with the linkage level between inflation and oil prices. We expect that carbon taxes can mitigate inflation pressure caused by an increase in oil price. Our research provides meaningful reference information for policymakers to make "dual" efforts to both protect the environment and to stabilize inflation. The results of our research models show that the final impact of carbon taxes on inflation is still significant and that carbon taxes can mitigate the negative impact level of oil price on inflation. In general, these results are important implications for countries in the process of making economic and environmental policies. They also serve as a foundation for reference and discussion to provide guidance for countries in developing environmental protection and economic development policies.