A recent working paper by the European Central Bank examining the employment effects of carbon pricing under the European Union’s Emissions Trading System found that higher carbon prices have a persistent negative effect on overall employment.

According to the paper, “an exogenous 1% increase in EU-ETS prices leads to a roughly 0.2% decline in employment after one and a half years.” The effects are even more pronounced in carbon-intensive sectors, where price shocks “are estimated to lead to a roughly 1% reduction in employment” — approximately five times larger than the estimated impact on aggregate employment.

The study also finds that the effects vary depending on the level of free emissions allowances allocated and the strength of employment protection policies. In countries where firms receive a larger share of free allowances relative to their emissions, increases in EU-ETS prices tend to have a significantly smaller effect on overall employment.

Furthermore, the findings suggest that high carbon prices had only a limited and temporary effect on average hours worked in countries with high levels of free emissions allowances, while countries with lower levels of free allowances saw an increase in average weekly working hours.

The study also shows that in countries with relatively weaker employment protection, high carbon prices “are estimated to have a significant, negative effect on employment over the two years following impact.”

The European Central Bank working paper offers both a conceptual and empirical framework for policymakers, providing what the authors describe as “valuable insights for policymakers balancing climate objectives with labour market considerations.”