Strategic Fossil Expansion and the Timing of the Energy Transition

Fabien Prieur ()
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Fabien Prieur: CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier

CEE-M Working Papers from CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro

Abstract: We develop a dynamic game of exhaustible resource exploitation with exploration, in which a regulator determines the end date of the fossil regime by trading off industry profits against climate damages. The weight assigned to damages reflects the fossil industry's political influence. We compare the open-loop Nash equilibrium with the piecewise closed-loop Nash equilibrium in which the regulator adopts a state-contingent stopping rule. In the open-loop equilibrium, regulation shortens the fossil regime and reduces cumulative emissions relative to the unregulated benchmark. But extraction is front-loaded: emissions are higher at each date within the shorter exploitation period. In the piecewise closed-loop equilibrium, a monopoly may increase exploration relative to the open-loop outcome in order to delay the transition. Strategic expansion arises when the regulator's stopping rule is locally increasing in reserves and when the private marginal value of exploration is sufficiently low. Calibrating the model to global oil market data, we show that the implied distortions can be economically meaningful. The analysis thus provides an explanation for sustained upstream fossil fuel investment despite announced net-zero commitments.

Keywords: open-loop vs piecewise closed-loop interaction; political influence; energy transition; exploration (search for similar items in EconPapers)
Date: 2026
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