The Green Paradox posits that fossil fuel markets respond to changing expectations about climate legislation, which limits future consumption, by shifting consumption to the present through lower present-day prices. We demonstrate that oil futures responded negatively to daily changes in the prediction market's expectations that the Waxman-Markey bill — the US climate bill discussed in 2009-2010 — would pass. This effect is consistent across various maturities as the proposed legislation would reset the entire price and consumption path, unlike temporary supply or demand shocks that phase out over time. The bill’s passage would have increased current global oil consumption by 2-4%. Furthermore, a strengthening of climate policy, as measured by monthly variations in media salience regarding climate policy over the last four decades, and two court rulings signaling limited future fossil fuel use, were associated with negative abnormal oil future returns. Taken together, our findings confirm that restricting future fossil fuel use will accelerate current-day consumption.
Authors
- Acknowledgements & Disclosure
- We would like to thank Kyle Meng and Derek Lemoine for sharing the prediction market data and for helpful feedback, as well as participants of the Virtual Seminar on Climate Economics by the Federal Reserve Bank of San Francisco and the Harvard Seminar in Environmental Economics and Policy. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32405
- Published in
- United States of America
