Harvard University
“Empirical Tests of the Green Paradox for Climate Legislation”
Time: 12:10pm-1:30pm
Location: 241 Giannini (please bring your own lunch)
Abstract: The Green Paradox posits that fossil fuel markets respond to evolving expectations about climate legislation, intended to limit future consumption, by shifting consumption to the present, lowering present-day prices. We demonstrate that oil futures reacted negatively to daily changes in prediction market expectations regarding the Waxman-Markey bill—the U.S. climate bill discussed in 2009–2010. This effect is observed across various maturities, with an even larger impact on more distant maturities, as the proposed legislation would have reset the entire price and consumption path, unlike temporary supply or demand shocks, which tend to phase out over time. The decrease in oil prices is accompanied by a decrease in storage levels as consumption accelerates while it takes time for new production to come online. Furthermore, two unexpected court rulings that implied limited future fossil fuel use were also associated with negative abnormal oil future returns. Taken together, these findings confirm that restricting future fossil fuel use accelerates current-day consumption. The passage of the Waxmann-Markey bill would have increased current global oil consumption by 2%. Full Paper