Climate Change Economics and Inflation Dynamics

Comprehensive practice flashcards covering climate change economics, carbon taxation, emission allowance markets, border mechanisms, and the macroeconomic causes, measurement, and control of inflation.

Kaya Equation

An identity expressing total carbon dioxide emissions as the mathematical product of economic output, energy intensity, and carbon intensity of energy: $\text{CO}_2 = \text{GDP} \times \frac{E}{\text{GDP}} \times \frac{\text{CO}_2}{E}$.

Climate Sensitivity

The degree of average global temperature change resulting from a given change in atmospheric $\text{CO}_2$ concentration, such as the historical increase from $280\,\text{ppm}$ to $410\,\text{ppm}$.

Optimal Task Performance Temperature

The ambient temperature identified by Seppanen et al. (2006) at which labor productivity and human task performance reach their normalized maximum of $1$, established at $22\,^{\circ}\text{C}$.

Asymmetric Climate Output Shocks

The empirical macroeconomic dynamic where a $1\,^{\circ}\text{C}$ increase in annual temperature causes positive output shocks in cooler nations (such as Norway, Sweden, and Germany) but negative output shocks in warmer nations (such as Egypt, Brazil, and Nigeria).

Remaining Carbon Budget (Paris Agreement)

The maximum cumulative emissions allowable to limit warming to $+2\,^{\circ}\text{C}$ by 2100, established at $800\,\text{Gt}$ of $\text{CO}_2$, which leaves approximately 20 years given global emissions of $40\,\text{Gt}$ per year.

Fit for 55

A European Union legislative package adopted in July 2021 comprising 12 measures under the European Green Deal, aiming to cut greenhouse gas emissions by $55\,\%$ by 2030 and achieve carbon neutrality by 2050.

Climate Neutrality Income Simulation (Bazot 2021)

A simulation indicating that under a $30\,\%$ global population increase, a $60\,\%$ reduction in fossil energy use, and perfectly equal global income distribution, the per capita income compatible with 2050 climate neutrality is $572\text{ euros}$ per month.

Path Dependency in Green Innovation

A concept identified by Philippe Aghion et al. (2016) in the automotive industry showing that firms innovate in clean or dirty technologies based on their own historical patenting experience and aggregate spillovers, requiring carbon taxes and subsidies to redirect technical change.

Intermediate Energy Trap

A structural risk identified by Aghion et al. (2020) where transitional fossil fuels like shale gas create a substitution effect away from dirtier coal, but generate an offsetting scale effect that locks in fossil fuel infrastructure and delays clean renewable energy adoption.

IPCEI Hy2Tech

An Important Project of Common European Interest authorized by the European Commission in 2022 providing up to $5.4\text{ billion euros}$ across 15 member states to finance hydrogen generation, fuel cells, storage, transport, and end-use technologies.

Green Claim Directive

A European legislative initiative proposed in March 2024 to curb corporate greenwashing, driven by an EU evaluation of 232 active ecolabels showing that nearly half featured weak or nonexistent third-party verification.

ReFuelEU Aviation

European Union regulation establishing mandatory minimum supply quotas of sustainable aviation fuels (SAF) at EU airports, starting at $2\,\%$ in 2025 and escalating to $63\,\%$ by 2050 (including $28\,\%$ synthetic aviation fuels).

Externality

A situation where the consumption or production activities of one entity affect the utility or production possibilities of another without compensation passing through the price mechanism, causing a divergence between private and social costs.

Pigouvian Tax

A price-based corrective tax set strictly equal to the difference between marginal social cost and marginal private cost, designed to internalize an external damage and reduce equilibrium output from private output ($O_p$) to social output ($O_s$).

Irish Plastic Bags Levy (2002)

A targeted environmental tax on plastic shopping bags in Ireland that successfully demonstrated behavioral change, reducing plastic bag presence in national litter composition from $5.00\,\%$ in 2001 to $0.32\,\%$ in 2002.

SNBC (Stratégie Nationale Bas-Carbone)

France's national low-carbon roadmap defining greenhouse gas reduction targets to limit national territorial emissions to $310\text{ million tons}$ of $\text{CO}_2$ equivalent by 2030.

Tradable Carbon Card

An individual quota mechanism that allocates an annual baseline quota of $\text{CO}_2$ emissions to every citizen, allowing low emitters (frequently low-income households) to sell surplus credits to higher emitters.

Cap and Trade System

A market-based environmental regulatory mechanism that sets an aggregate quantitative cap on total permissible pollution and allows firms with heterogeneous abatement costs to trade emission allowances, minimizing total compliance costs.

Carbon Leakage

The displacement of carbon-intensive production and investment from regions with strict climate policies to jurisdictions with laxer environmental constraints, estimated in empirical literature to range between $5\,\%$ and $30\,\%$.

Climate Club (Nordhaus 2015)

An international climate agreement proposed by William Nordhaus where participant countries set a harmonized internal carbon price and levy a uniform penalty tariff (such as $4\,\%$) on all imports from non-member nations.

CBAM (Carbon Border Adjustment Mechanism)

An EU trade measure initiated with reporting in 2023 and entering full force in 2026 that charges importers for the carbon emissions embedded in imported goods in targeted sectors (like cement and aluminum) to match the EU ETS carbon price.

Inflation

A persistent, non-transitory increase in the general price level of consumer goods and services across the entire economy, tracked through an aggregate consumer price index.

Core Inflation

A calculated price index metric that strips out volatile components—specifically food and energy prices—to assess underlying structural price stability.

Deflation

A sustained decline in the general price level of goods and services, as exemplified by Japan's prolonged consumer price index contraction adjusted for sales tax increases throughout the 2000s and early 2010s.

Hyperinflation

An extreme, unmanageable surge in the price level driven by deficit monetization and central bank subordination, exemplified by Weimar Germany in 1923, Zimbabwe in 2008, and Venezuela in 2018.

Phillips Curve

An empirical relationship documented by A.W. Phillips (1958) depicting an inverse, convex, and historically observed trade-off between the unemployment rate and the rate of inflation or nominal wage growth.

NAIRU

The Non-Accelerating Inflation Rate of Unemployment, representing the specific structural unemployment rate at which the rate of inflation remains stable.

Price-Wage Loop

A self-reinforcing macroeconomic wage-price spiral where initial price increases reduce consumer purchasing power, causing workers to demand higher wages, which compresses firm margins and forces further price hikes.

Quantity Theory of Money

A monetarist proposition formulated by Milton Friedman stating that inflation is always and everywhere a monetary phenomenon, expressed by the equation of exchange: $M \times V = P \times Y$, yielding $\frac{dP}{P} = \frac{dM}{M} - \frac{dY}{Y}$ when velocity ($V$) is constant.

Pent-Up Wage Cuts

A labor market rigidity concept formulated by Mary C. Daly and Bart Hobijn (2015) explaining the post-2008 flattening of the Wage Phillips curve: employers who avoided cutting wages during the recession worked off a backlog of wage restraint during the recovery.

Time Inconsistency of Optimal Monetary Policy

A macroeconomic theory established by Finn Kydland and Edward Prescott explaining how central banks face incentives to renege on announced low inflation rules to temporarily reduce unemployment, leading rational agents to form higher inflation expectations.

Central Bank Independence (CBI)

The institutional insulation of a central bank from executive and political interference, demonstrated empirically by Alberto Alesina and Lawrence Summers (1993) to correlate strongly with lower average inflation rates.

Anchoring of Inflation Expectations

The structural state in which long-term market forecasts and wage negotiations remain fixed on the central bank's declared inflation target (such as the Federal Reserve's $2\,\%$ target) despite temporary cost shocks.

China Import Price Effect

The microeconomic trade finding by Xavier Jaravel and Erick Sager showing that a $1\,\text{percentage point}$ increase in US import penetration from China caused a $1.91\,\%$ decline in consumer prices, driven by squeezed markups on domestic goods.

Great Demographic Reversal

A macroeconomic thesis by Charles Goodhart and Manoj Pradhan positing that the global exhaustion of cheap labor from China and Eastern Europe, combined with aging populations, reverses disinflationary demographic tailwinds into structural inflation.

Demographic Inflation U-Curve

An empirical finding by Mikael Juselius and Előd Takáts (IMF 2016) showing that cohorts aged 5–29 and 65–79 years exert upward pressure on inflation through consumption and dis-saving, while the working cohort aged 30–64 years dampens inflation.

Life-Cycle Theory of Saving

A consumption framework developed by Franco Modigliani illustrating that individuals are net dis-savers and consumers during young age and retirement, whereas they are net savers during their productive working life.

Climate Inflation

Direct and indirect upward pressures on consumer price levels caused by extreme weather events, crop losses, agricultural shortages, and rising property and casualty insurance premiums.

Fossilflation

A persistent cost-push inflationary pressure caused by the deliberate policy-driven increase in fossil fuel prices through higher carbon taxes, the removal of sectoral exemptions, and escalating allowance purchase costs.

Greenflation

The surge in production costs and finished product prices stemming from severe supply inelasticities and high geographic concentration in critical minerals (such as lithium and copper) required for clean transition infrastructure.

Shoe-Leather Costs

The real transaction costs, resources, and time expended by households and financial managers in reducing cash holdings to protect purchasing power during inflationary episodes.

ECB Key Policy Rates

The three monetary policy rates managed by the European Central Bank: the main refinancing operations rate (one-week liquidity), the marginal lending facility rate (overnight credit), and the deposit facility rate (overnight deposits).