By reducing the demand for fossil fuels, climate policy can reduce scarcity rents for fossil resource owners. As mitigation policies ultimately aim to limit emissions, a new scarcity for “space” in the atmosphere to deposit emissions is created. The associated scarcity rent, or climate rent (that is, for example, directly visible in permit prices under an emission trading scheme) can be higher or lower than the original fossil resource rent. In this paper, we analyze analytically and numerically the impact of mitigation targets, resource availability, backstop costs, discount rates and demand parameters on fossil resource rents and the climate rent. We assess whether and how owners of oil, gas and coal can be compensated by a carbon permit grandfathering rule. One important finding is that reducing (cumulative) fossil resource use could actually increase scarcity rents and benefit fossil resource owners under a permit grandfathering rule. For our standard parameter setting overall scarcity rents under climate policy increase slightly. While low discount rates of resource owners imply higher rent losses due to climate policies, new developments of reserves or energy efficiency improvements could more than double scarcity rents under climate policy. Another important implication is that agents receiving the climate rent (regulating institutions or owners of grandfathered permits) could influence the climate target such that rents are maximized, rather than to limit global warming to a socially desirable level. For our basic parameter setting, rents would be maximized at approximately 650 GtC emissions (50% of business-as-usual emissions) implying a virtual certainty of exceeding a 2 °C target and a likelihood of 4 °C warming.
Copyright © 2013, Elsevier
Global warming, Geo rent, Hotelling, Carbon budget, Fossil resources, Renewable energy
Kalkuhl, Matthias and Brecha, Robert J., "The Carbon Rent Economics of Climate Policy" (2013). Physics Faculty Publications. 19.
Engineering Physics Commons, Environmental Indicators and Impact Assessment Commons, Environmental Monitoring Commons, Natural Resource Economics Commons, Natural Resources and Conservation Commons, Natural Resources Management and Policy Commons, Optics Commons, Other Environmental Sciences Commons, Other Physics Commons, Quantum Physics Commons, Sustainability Commons