Carbon Emissions and Inflation Dynamics in the Eurozone: An Empirical GMM Approach

Climate change and the transition toward a low-carbon economy have intensified the debate on the interaction between environmental factors and macroeconomic stability. While recent studies have mainly focused on how monetary policy can address climate-related risks, much less attention has been devoted to the potential influence of environmental indicators on inflation. This paper examines the relationship between carbon emissions and inflation dynamics across 20 Eurozone countries over the period 2010–2023. Using annual panel data, we estimate a dynamic model based on the System Generalized Method of Moments (System GMM) to account for inflation persistence and potential endogeneity. The empirical framework incorporates carbon emissions per capita together with final energy consumption, the EUR/USD exchange rate, and the trade balance as key macroeconomic control variables. The baseline specification does not reveal a statistically significant relationship between carbon emissions and inflation. However, robustness analysis based on a first-differenced System GMM specification identifies a significant negative association, suggesting that environmental factors may influence inflation dynamics under alternative model specifications. Energy consumption and exchange rate movements also emerge as important determinants of inflation.

These findings contribute to the growing literature linking climate-related variables and monetary policy by highlighting the relevance of incorporating environmental indicators into inflation analysis while emphasizing the need for cautious interpretation and further empirical investigation.