This paper studies the nonlinear adjustment between industrial production and carbon prices – coined as ‘the carbon-macroeconomy relationship’ – in the EU 27. We model carbon price returns and industrial production as nonlinear and state-dependent, with dynamics depending on the sign and...

his paper develops a model of carbon pricing by considering two fundamental drivers of European Union Allowances : economic activity and energy prices. On the one hand, economic activity is proxied by aggregated industrial production in the EU 27 (as it provides the best performance in a...