Balancing the carbon budget for oil: The distributive effects of alternative policies

Fischer, Carolyn; Salant, Stephen W.

doi:10.1016/j.euroecorev.2017.04.003

Cited by 28 publications

(22 citation statements)

References 37 publications

(29 reference statements)

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“…Our focus is the effects of different climate policy instruments on asset stranding (cf. Goulder and Parry, 2008;Fischer and Newell, 2008;Fischer and Salant, 2017;Rozenberg et al, 2019). We compare the effects of certain and uncertain policies designed to keep global carbon warming below the Paris target of 2°C.…”

Section: Exploration Capital and Other Physical Assets Industries Thamentioning

confidence: 99%

The risk of policy tipping and stranded carbon assets

Ploeg

Rezai

2020

Journal of Environmental Economics and Management

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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 will be true for exploration capital too. Third, unanticipated changes in present or expected future climate policy cause instantaneous 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. E.g. abandoning climate policy plans immediately boosts scarcity rent, market capitalization, exploration investment and discoveries. To explain and quantify these four effects, we use an analytical model of investment in exploration capital with intertemporal adjustment costs, depletion of reserves 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 different instruments: 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.

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Section: Exploration Capital and Other Physical Assets Industries Thamentioning

confidence: 99%

The risk of policy tipping and stranded carbon assets

Ploeg

Rezai

2020

Journal of Environmental Economics and Management

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“…For completeness we also study the effect of (exogenous) technological change that leads to a lower cost of producing the backstop technology b. This is different from assuming a gradual decline in the backstop cost as examined by Fischer and Salant (2017). We will consider marginal changes in parameters.…”

Section: Policy Analysismentioning

confidence: 99%

“…See Groot et al (1992) for the case without and Benchekroun et al (2017) for the case with a backstop technology. Following Fischer and Salant (2017), we furthermore abstract from dirty backstops (cf. Michielsen, 2014) and interpret the backstop technology as being able to produce biofuels or to enable the electrification of transport in combination with technologies that generate clean electricity, such as wind and solar.…”

Section: Introductionmentioning

confidence: 99%

Limit pricing, climate policies, and imperfect substitution

Meijden

Withagen

2019

Resource and Energy Economics

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The effects of climate policies are often studied under perfect competition and constant marginal extraction costs. In this paper, we allow for monopolistic fossil fuel supply and more general cost functions, which, in the presence of perfectly substitutable renewables, gives rise to limit-pricing behavior. Four phases of supply may exist in equilibrium: sole supply of fossil fuels below the limit price, sole supply of fossil fuels at the limit price, simultaneous supply of fossil fuels and renewables at the limit price, and sole supply of renewables at the limit price. The consequences of climate policies for initial extraction depend on the initial phase: in case of sole supply of fossil fuels at the limit price, a renewables subsidy increases initial extraction, whereas a carbon tax leaves initial extraction unaffected. With simultaneous supply at the limit price or with sole supply of fossil fuels below the limit price, a renewables subsidy and a carbon tax lower initial extraction. Both policy instruments decrease cumulative extraction. If fossil fuels and renewables are imperfect but good substitutes, the monopolist will exhibit 'limit-pricing resembling' behavior, by keeping the effective price of fossil close to that of renewables for considerable time.

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“…Benchekroun et al, 2009Benchekroun et al, , 2010Benchekroun et al, , 2019. Conventional OPEC oil is cheaper and its extraction is less carbon intensive than unconventional oil owned by relatively small oil producers (Malins et al, 2014;Fischer and Salant, 2017;OCI, 2019). Technically recoverable reserves and production of unconventional types of oil by non-OPEC countries have grown significantly over the last decade.…”

Section: Introductionmentioning

confidence: 99%

“…Furthermore, we determine the effects of a resource tax, and perform a sensitivity analysis for reserves, extraction costs, emission factors of the cartel and the fringe, and the specification of the demand function. Our analysis takes into account that conventional oil supplied by OPEC has lower marginal extraction costs and is cleaner than oil from deep-water drilling, oil sands, oil shale, and shale oil supplied by the fringe (Malins et al, 2014;Fischer and Salant, 2017;OCI, 2019). Our main findings are as follows.…”

Section: Introductionmentioning

confidence: 99%

OPEC, unconventional oil and climate change - On the importance of the order of extraction

Benchekroun

Meijden

Withagen

2020

Journal of Environmental Economics and Management

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We show that OPEC's market power contributes to climate change by enabling producers of relatively expensive and dirty oil to start producing before OPEC reserves are depleted. We examine the importance of this extraction sequence effect by calibrating and simulating a cartel-fringe model of the global oil market. While welfare net of climate damage under the cartel-fringe equilibrium can be significantly lower than under a first-best outcome, almost the entire welfare loss is due to the sequence effect of OPEC's market power. In our benchmark calibration, the cost of the sequence effect amounts to 15 trillion US$, which corresponds to 97 percent of the welfare loss. Moreover, we find that an increase in non-OPEC oil reserves decreases global welfare. In a counterfactual world without non-OPEC oil, global welfare would be 13 trillion US$ higher, 10 trillion US$ of which is due to lower climate damages.

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Balancing the carbon budget for oil: The distributive effects of alternative policies

Cited by 28 publications

References 37 publications

The risk of policy tipping and stranded carbon assets

The risk of policy tipping and stranded carbon assets

Limit pricing, climate policies, and imperfect substitution

OPEC, unconventional oil and climate change - On the importance of the order of extraction

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