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The risk of policy tipping and stranded carbon assets

The risk of policy tipping and stranded carbon assets

Authors :
Frederick van der Ploeg
Armon Rezai
Tinbergen Institute
Spatial Economics
Source :
van der Ploeg, F & Rezai, A 2020, ' The risk of policy tipping and stranded carbon assets ', Journal of Environmental Economics and Management, vol. 100, 102258 . https://doi.org/10.1016/j.jeem.2019.102258, Journal of Environmental Economics and Management, 100:102258. Academic Press Inc.
Publication Year :
2020

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.

Details

Language :
English
ISSN :
00950696
Database :
OpenAIRE
Journal :
van der Ploeg, F & Rezai, A 2020, ' The risk of policy tipping and stranded carbon assets ', Journal of Environmental Economics and Management, vol. 100, 102258 . https://doi.org/10.1016/j.jeem.2019.102258, Journal of Environmental Economics and Management, 100:102258. Academic Press Inc.
Accession number :
edsair.doi.dedup.....b868ce54b25662eb9b43f07fbb4392fa
Full Text :
https://doi.org/10.1016/j.jeem.2019.102258