This paper addresses the macroeconomic effects of subnational carbon pricing initiatives, focusing on California's cap and trade. Using high-frequency data and regulatory news, I construct a carbon policy surprise series to understand the aggregate effects of a carbon policy shock using impulse response functions from a SVAR model. Results suggest that a shock tightening the carbon pricing regime leads to an immediate significant reduction in carbon emissions by 0.05%, albeit this reduction in emissions comes at the expense of an immediate temporary fall in economic activity by 0.01%. On the other hand, results suggest that increasing carbon prices do not transmit to either household energy prices or consumer prices. Likewise, estimations suggest that a positive shock to carbon prices decreases the monetary policy rate and increases unemployment, albeit not statistically significant at the 10\%. I resort to local projections as robustness checks and find that the prior conclusions hold, i.e., that the California's cap and trade initiative has significant macroeconomic effects.
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