Green Expectations: Current Effects of Anticipated Carbon Pricing
University of Arizona Department of Economics Working Paper No. 13-09
74 Pages Posted: 10 Apr 2013 Last revised: 20 Feb 2014
Date Written: December 28, 2013
Resource markets are linked over time through extraction, storage, and durable demand-side investments. I show that an anticipated strengthening of environmental policy can increase emissions today through the first two linkages and can decrease them through the third. I then use a unique legislative event to measure the strength of these linkages in U.S. energy markets. As predicted by each of these linkages, the unexpected collapse of the U.S. Senate's 2010 climate effort generated positive excess returns in coal futures markets. The term structure of these excess returns implies that the storage market is the primary channel for intertemporal emission leakage. Whereas the proposed legislation aimed to reduce U.S. greenhouse gas emissions after 2013, the legislative process itself increased emissions by over 12 million tons leading up to April 2010.
Keywords: green paradox, anticipation, energy, futures, emissions, climate, leakage, storage
JEL Classification: H23, Q41, Q58
Suggested Citation: Suggested Citation