Green Expectations: Current Effects of Anticipated Carbon Pricing

Markets respond not just to  current emission policies but also to expectations of future emission policies.  We show that a future carbon pricing policy has an anticipation effect which,  in theory, increases emissions prior to the policy's start date. We then  identify this anticipation effect in energy markets: coal futures spiked upon  the collapse of the U.S. Senate climate effort in April 2010. This collapse  presumably reduced the shadow cost of future carbon emissions, but it meanwhile  raised the shadow cost of contemporary emissions by at least $1 per t  CO2.  While a carbon price could plausibly increase natural gas  consumption by substitution for coal, natural gas futures prices suggest that  the Senate bill would have instead reduced the equilibrium quantity of natural  gas.

Speaker: Derek Lemoine, Univ of Arizona