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The upside hedge value of California's global warming policy given uncertain future oil prices

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  • Fine, James
  • Busch, Christopher
  • Garderet, Remy

Abstract

The economic modeling that policymakers typically rely on—and all the economic modeling of AB 32 (California's Global Warming Solutions Act)—assumes smooth future price paths, ignoring the reality of significant price volatility of fuels derived from crude oil. To add some insight into the value of reduced exposure to gasoline and diesel price spikes as a result of climate policies like AB 32, we define the benefit of upside hedge value: the extra avoided expenditures on gasoline and diesel fuel that accrue when their prices spike. We develop two historically-grounded price spike scenarios: a moderate spike of 25% and a large spike of 50%. After accounting for short-term price elasticity of demand effects, we estimate the upside hedge value to be between $2.4 billion and $5.2 billion (all 2007 dollars) for the moderate and large hypothetical shock scenarios, respectively.

Suggested Citation

  • Fine, James & Busch, Christopher & Garderet, Remy, 2012. "The upside hedge value of California's global warming policy given uncertain future oil prices," Energy Policy, Elsevier, vol. 44(C), pages 46-51.
  • Handle: RePEc:eee:enepol:v:44:y:2012:i:c:p:46-51
    DOI: 10.1016/j.enpol.2012.01.010
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    References listed on IDEAS

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    1. Espey, Molly, 1998. "Gasoline demand revisited: an international meta-analysis of elasticities," Energy Economics, Elsevier, vol. 20(3), pages 273-295, June.
    2. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    3. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 781-808, May.
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    Cited by:

    1. Luís Aguiar-Conraria & Maria Joana Soares & Rita Sousa, 2017. "California´s Carbon Market and Energy Prices: A Wavelet Analysis," NIPE Working Papers 13/2017, NIPE - Universidade do Minho.
    2. Rita Sousa & Luís Francisco Aguiar-Conraria & Maria Joana Soares, 2014. "Carbon and Energy Prices: Surfing the Wavelets of California," NIPE Working Papers 19/2014, NIPE - Universidade do Minho.

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    Keywords

    Climate; California; Energy price volatility;

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