This paper presents two types of analysis on the interaction between policies to deal with climate change and monetary policies in the euro area. First, we empirically analyze the historical effects of carbon taxes on inflation in the euro area countries to gauge the impact under the current European monetary regime. Second, we explore two alternative monetary policy rules under a range of simulations in a new European version of the G-Cubed multisector model. We study the economic and inflationary impacts of physical climate change shocks (climate risk) and transitions risks arising from carbon taxation within Europe and globally. We find that under the existing monetary policy framework, the inflationary effects of carbon taxes in Euro area countries have been contained. The only significant increase in the HICP (of about 0.8 index points) is found in the first two years. At the same time, however, the impact on core inflation tended to be negative. Thus, carbon taxes mainly affected relative prices rather than the overall price level, which is in line with previous findings for a broader sample of countries. We also find that producers seem to have absorbed a part of the carbon tax since consumer price inflation was lower than producer price inflation.