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The risk of policy tipping and stranded carbon assets

Frederick (Rick) van der Ploeg () and Armon Rezai

Journal of Environmental Economics and Management, 2020, vol. 100, issue C

Abstract: 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.

Keywords: Fossil fuel; Exploration investment; Discoveries; Stranded carbon assets; Stock prices; Irreversible capital; Adjustment costs; Policy tipping; Botched climate policies (search for similar items in EconPapers)
JEL-codes: D20 D53 D92 G11 H32 Q02 Q35 Q38 Q54 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:100:y:2020:i:c:s0095069618302481

DOI: 10.1016/j.jeem.2019.102258

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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