Carbon pricing and energy greenflation over COVID-19

With our clamor for higher prices due to the additional costs of going green, we urgently need a quantitative analysis to support the evidence. We aim to analyze energy greenflation, focusing on carbon pricing empirically. For this analysis, we propose a novel price correlation and volatility model between energy and carbon based on the buying pressure-price relationship, in which greenflation appears as two channels of cost-push and demand-pull inflation. The empirical studies using the prices of EUA, Brent crude oil, ARA coal, and NBP natural gas show that the impact of carbon prices on energy prices before and after COVID-19 has changed from the original role of reducing energy consumption to the new one of driving the greenflation of higher energy prices on the back of higher carbon prices via two channels of cost-push and demand-pull greenflation. Empirical studies show that the outbreak of COVID-19 highlights carbon risk and changes the risk-return relationship between energy and carbon from rational positive, consistent with the pursuit of short-term profits, to irrational negative. Considering that these results represent the transformation of the investor's perspective from myopic to hyperopic, the outbreak of COVID-19 may accelerate energy greenflation. We discuss the validation of greenflation after the COVID-19 outbreak using robustness checks based on VAR model and data sampling analyses, Granger causality tests, regime-switching model analyses, and carbon price-European VIX relation analyses. As for the energy policy implication, carbon pricing towards zero emissions must take the adverse effects of greenflation on the environment and economics into full consideration.