Climate Policy and Stranded Carbon Assets: A Financial Perspective

Frederick (Rick) van der Ploeg and Armon Rezai

No 206, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: Unanticipated climate policy curbs the value of physical capital that is costly to adjust. We illustrate this by showing that climate policy to keep peak global warming below 2°C depresses the share prices of oil and gas majors and their market capitalisation, curbs exploration investment and oil and gas discoveries, boosts proven reserves left abandoned in the crust of the earth, cuts exploitation investment, and induces an earlier onset of the carbon-free era. For a given carbon budget, an immediate carbon tax is the first-best response but delaying the carbon tax or a renewable energy subsidy to meet the same temperature target are preferred by shareholders because they introduce Green Paradox effects and protect the profitability of existing capital.

Keywords: climate policy; fossil fuel; exploration investment; discoveries; exploitation investment; stranded carbon assets; stock prices; irreversible capital; adjustment costs (search for similar items in EconPapers)
JEL-codes: D20 D53 D92 G11 H32 Q02 Q35 Q38 Q54 (search for similar items in EconPapers)
Date: 2018-03-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
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Citations: View citations in EconPapers (4)

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