How Does the Cost of Capital Affect Oil Production?

Helena Cordt, Julien Daubanes, Yiding Ma and Julien Xavier Daubanes

No 12865, CESifo Working Paper Series from CESifo

Abstract: In the spirit of green finance taxonomies, restricting fossil-fuel producers' access to funds is hoped to help address the climate problem. We develop a project-level model of oil production, calibrate it to the universe of U.S. and Canadian oil projects producible over 2000-2024, and simulate the effects of the cost of capital. Modest increases in this cost are counterproductive, increasing oil production through industry short-termism while reducing project value. Effective costs of capital are unrealistically large, at odds with projects' internal rates of return. At the industry level, a higher cost of capital generates equilibrium adjustments that boost oil profitability.

Keywords: oil divestment; green finance; short-termism; unintended policy impact; internal rates of return (search for similar items in EconPapers)
JEL-codes: G1 H20 Q31 (search for similar items in EconPapers)
Date: 2026
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