Conference Agenda

Many socially desirable policies are not implemented because of their ex-ante unpopularity, but this unpopularity may be overcome through experience with the policy. In this paper, we examine how opposition to carbon pricing in the state of Washington turned into support after voters experienced a cap-and-trade policy with revenues earmarked for environmental purposes – "cap-and-invest." Analyzing voting behavior at the census block group level, we observe that support varies by political affiliation as expected, but experience consistently increases support across the board. Using a proprietary survey, we further show that the increase in support among voters in Washington state is specific to the cap-and-invest policy they experienced; support for carbon pricing or climate policies more generally remained unchanged.

This paper investigates the persistent positive futures-spot price spread observed in the EU Emissions Trading System. We develop a stochastic allowance market model with heterogeneous, risk-averse regulated firms and a representative non-regulated, financial actor. All agents can trade spot allowances, bank them, and trade futures contracts, but only regulated firms can abate emissions and have compliance obligations. While firm heterogeneity is central for understanding hedging behavior, we show that when regulated firms' aggregate hedging demand is net long, equilibrium futures prices exceed the spot price adjusted for the risk-free interest rate, generating a positive price spread. This prediction is tested empirically using an error correction model estimated on weekly data from 2018-2025, leveraging Commitment of Traders reports to compute a proxy for hedging pressure. This confirms a significant long-run relationship between net hedging demand and the price spread. The paper offers a coherent explanation of futures premia in carbon markets and illustrates how firm heterogeneity and risk-management behavior shape carbon price dynamics.

his study examines the short-term effects of the European Union’s Emissions Trading System 2 (ETS2) on fossil fuel consumption, carbon prices, and household welfare, explicitly accounting for heterogeneity in incomes. ETS2 effectively enforces emissions reductions but increases fossil fuel prices, reducing both individual and aggregate utility, with disproportionately large effects on low-income households. To mitigate these distributional consequences, we compare two revenue-recycling mechanisms: a unitary subsidy on fossil fuel consumption and a lump-sum transfer. While unitary subsidies distort marginal consumption incentives and produce nonlinear and sometimes ambiguous effects on aggregate welfare, lump-sum transfers preserve marginal prices, provide predictable welfare outcomes, and enhance policy transparency, potentially increasing public acceptability. Importantly, ETS2 acts as a binding environmental safety net: by capping total fossil fuel use, it ensures environmental compliance regardless of redistribution design. Our results highlight the effectiveness of combining ETS2 with targeted lump-sum transfers for achieving both environmental and social objectives, while underscoring the need for further research on long-term adaptation, technology adoption, and societal acceptance of such regulatory packages.