Other, pp.1-25, 2023
The risk of climate change has increased as global inflation has risen. This paper aims to investigate the effects of inflation on carbon emissions during periods of stable inflation, a positive inflation shock, and a negative inflation shock. In conducting this investigation, the paper considers two additional factors. First is the impact of inflation on the primary determinants of carbon emissions, which are the gross domestic product, nonrenewable and renewable energy, total factor productivity, and financial development. Second are the effects of these five variables on carbon emissions simultaneously. The paper has three main conclusions. First, a negative shock and a positive shock to inflation are more conducive to climate change mitigation in high-income and upper-middle-income countries, respectively. Second, financial development may play a crucial role in reversing or reducing the carbon-increasing effects of inflation in both country groups during both positive and negative shocks to inflation. Thirdly, carbon emissions in upper-middle-income countries may decline during the current period of elevated inflation. In contrast to periods of stable inflation, however, the impact of high inflation on carbon emissions in high-income countries is uncertain. The paper provides pertinent policy suggestions specific to high-income and upper-middle-income countries.