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Carbon taxes are seen as an effective policy lever to tackle climate change.
Reducing carbon emissions is key to curbing global warming, which is one of the biggest long-term risks for the world economy.
Schroders, in a recent report, says carbon taxes not only curb demand for fossil fuels but encourage business investments in renewable energy and low-carbon technologies thereby, stimulating innovation.
Taxes are also a revenue source for governments.
To analyse the impact of carbon taxes on inflation, it uses the Oxford Economics Global Economic Model to consider three different scenarios: net zero, net zero transformation and delayed transition.,
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The findings show that carbon taxes will lead to inflationary pressures and it will be more pronounced for economies that still largely depend on energy from fossil fuels.
Countries highly dependent on oil like Brazil, Japan, Russia and the United States will also see significant increases in fuel prices.
The impact on European countries will be limited as they use cleaner energy sources.Achieving net-zero emission requires a radical decarbonisation of the energy mix.
By 2050, all coal mining will need to end, stranding these assets, it said.
The move to net-zero will also boost demand for key industrial metals used to generate and store renewable energy.
Given supply challenges, this is likely to add further pressure on inflation due to higher prices for aluminum, copper, cobalt and lithium.
But as countries decarbonise their energy production and move away from taxed products, inflation will start declining in the second half of 2020s, returning to its baseline level by 2050, it says.