The Risk of Policy Tipping and Stranded Carbon Assets

46 Pages Posted: 7 Aug 2019

See all articles by Rick van der Ploeg

Rick van der Ploeg

University of Oxford - Department of Economics

Armon Rezai

Vienna University of Economics and Business

Date Written: 2019

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 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.

Keywords: fossil fuel, exploration investment, discoveries, stranded carbon assets, stock prices, irreversible capital, adjustment costs, policy tipping, botched climate policies

JEL Classification: D200, D530, D920, G110, H320, Q020, Q350, Q380, Q5

Suggested Citation

der Ploeg, Rick van and Rezai, Armon, The Risk of Policy Tipping and Stranded Carbon Assets (2019). CESifo Working Paper No. 7769, Available at SSRN: https://ssrn.com/abstract=3432817

Rick van Der Ploeg (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

Armon Rezai

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
38
Abstract Views
238
PlumX Metrics