The Carbon Footprint of U.S. Monetary Policy

This paper examines how U.S. monetary policy indirectly affects industrial and energy-related carbon dioxide emissions through production. Using an instrumental variables approach, we exploit the interaction between state-level manufacturing employment shares and monetary policy shocks to capture differential exposure across states. We find that a one percentage point increase in the Federal Reserve’s intended funds rate—unrelated to anticipated economic developments—leads to an average cumulative reduction of 0.19% in industrial CO₂ emissions and 0.12% in energy-related CO₂ emissions. These findings underscore the unintended environmental effects of monetary policy and the need to consider them in long-term climate strategies.