The Unequal Costs of Carbon Pricing: Economic and Political Effects Across European Regions

Abstract This paper examines the economic and political effects of carbon pricing across European regions. Our main finding is that a well-identified increase in carbon prices reduces emissions, but entails economic and political costs: higher carbon prices significantly reduce output and employment while increasing vote shares for extremist and populist parties, contributing to political fragmentation. Consistent with an economic voting channel, opinion surveys reveal a more pessimistic economic outlook and declining environmental concerns among respondents. Importantly, the economic and political costs are not borne equally: carbon-intensive regions experience a larger decline in output and see a stronger shift to extremist political parties. Our findings highlight the need for complementary policies to mitigate the unequal economic impacts of carbon pricing and the associated political backlash.