Research findings have revealed that climate transition policies, such as imposing a carbon tax, may lead to a 'trade-off' between curbing inflation and economic growth.

Marco Del Negro, an economic analysis advisor at the Federal Reserve Bank of New York, introduced a paper titled 'Does Green Transition Cause Inflation?' at the 'BOK International Conference' held at the conference room of the annex of the Bank of Korea in Jung-gu, Seoul, on the 3rd.

Bank of Korea Governor Lee Chang Yong and Federal Reserve Board member Christopher Waller engage in a discussion on various currency policy issues, including the outlook for the U.S. economy, at the 2025 BOK International Conference held on the 2nd of this month at the Bank of Korea's annex in Jung-gu, Seoul. /Courtesy of Yonhap News Agency

Commissioner Negro argued that it is necessary to re-examine the impact of climate policy on inflation, considering differences in price rigidities between carbon-intensive industries and other industries, as well as the interdependence between industries. This contrasts with previous research that claimed the green transition has only a limited impact on inflation.

Commissioner Negro noted, "If the price rigidity of carbon-intensive industries is low, the Central Bank may have to tolerate inflation to achieve its potential growth rate target when a carbon tax is imposed," adding, "Conversely, to maintain inflation at the target level, the Central Bank must accept an economic slowdown to raise prices in other sectors with high price rigidity."

Commissioner Negro estimated the inflation trend while the Central Bank seeks to achieve the potential growth rate as the U.S. gradually raises the carbon tax from $0 to $100 over approximately eight years (100 months). As a result, the core inflation rate is projected to be 0.5 to 1 percentage points higher than the target inflation rate for about ten years.

Commissioner Negro said, "The reason imposing a carbon tax causes inflation is that the price rigidity of carbon-intensive industries is small and the energy industry occupies a central position in the U.S. industrial system."

He continued, "While a green transition does not necessarily cause inflation, short-term economic declines may need to be tolerated to curb inflation during a green transition," adding, "Central Bank policymakers need to consider the trade-off between price stability and achieving potential growth rates induced by the green transition."

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