The effects of carbon pricing along the production network

Carbon markets are a central instrument to decarbonise our economies and mitigate the impacts of climate change. Within the European Union, carbon pricing to date has primarily targeted electricity generation and greenhouse gas-intensive industries, and regulatory focus has typically been confined to a subset of firms. This paper explores how the carbon price confronting regulated firms not only shapes their own operations and investment choices but also exerts influence on other entities within their customer and supplier network, even in the absence of direct carbon pricing of these suppliers or clients. Such influence could manifest through alterations in production processes, products and prices, market structures and innovation. Leveraging a distinctive dataset for Belgium, this research investigates the impact of the EU’s carbon price on lowcarbon innovation, supply-chain dynamics, and energy economic activity throughout the Belgian economy’s production network.