TY - JOUR
T1 - The risk of policy tipping and stranded carbon assets
AU - van der Ploeg, Frederick
AU - Rezai, Armon
PY - 2020/3
Y1 - 2020/3
N2 - If global warming is to stay below 2 °C, there are four risks of assets stranding. First, substantial fossil fuel reserves will be stranded at the end of the fossil era. Second, this is true for exploration capital too. Third, unanticipated changes in present or expected climate policy cause discrete jumps in today's valuation of physical and natural capital. Fourth, if timing and intensity of climate policy are uncertain, revaluation of assets occurs as uncertainty about future climate policy is resolved. To highlight these four effects, we use an analytical model of investment in exploration capital with intertemporal adjustment costs, reserves depletion and market capitalization, and calibrate it to the global oil and gas industry. Climate policy implements a carbon budget commensurate with 2 °C peak warming and we allow for immediate or delayed carbon taxes and renewable subsidies. The social welfare ranking of these instruments is inverse to that of the oil and gas industry which prefers renewable subsidy and delaying taxes for as long as possible. We also pay attention to how the legislative “risk” of tipping into policy action affects the timing of the end of the fossil era, the profitability of existing capital, and green paradox effects.
AB - If global warming is to stay below 2 °C, there are four risks of assets stranding. First, substantial fossil fuel reserves will be stranded at the end of the fossil era. Second, this is true for exploration capital too. Third, unanticipated changes in present or expected climate policy cause discrete jumps in today's valuation of physical and natural capital. Fourth, if timing and intensity of climate policy are uncertain, revaluation of assets occurs as uncertainty about future climate policy is resolved. To highlight these four effects, we use an analytical model of investment in exploration capital with intertemporal adjustment costs, reserves depletion and market capitalization, and calibrate it to the global oil and gas industry. Climate policy implements a carbon budget commensurate with 2 °C peak warming and we allow for immediate or delayed carbon taxes and renewable subsidies. The social welfare ranking of these instruments is inverse to that of the oil and gas industry which prefers renewable subsidy and delaying taxes for as long as possible. We also pay attention to how the legislative “risk” of tipping into policy action affects the timing of the end of the fossil era, the profitability of existing capital, and green paradox effects.
KW - Adjustment costs
KW - Botched climate policies
KW - Discoveries
KW - Exploration investment
KW - Fossil fuel
KW - Irreversible capital
KW - Policy tipping
KW - Stock prices
KW - Stranded carbon assets
UR - http://www.scopus.com/inward/record.url?scp=85072405346&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85072405346&partnerID=8YFLogxK
U2 - 10.1016/j.jeem.2019.102258
DO - 10.1016/j.jeem.2019.102258
M3 - Article
AN - SCOPUS:85072405346
SN - 0095-0696
VL - 100
JO - Journal of Environmental Economics and Management
JF - Journal of Environmental Economics and Management
M1 - 102258
ER -