Physics Faculty Publications

Document Type

Article

Publication Date

9-2013

Publication Source

Energy Economics

Abstract

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.

Inclusive pages

89-99

ISBN/ISSN

0140-9883

Document Version

Postprint

Comments

The document available for download is the authors' accepted manuscript, provided in compliance with publisher policy on self-archiving. Permission documentation is on file. It is licensed under the Creative Commons Attribution, Noncommercial, No-derivatives license (CC-BY-NC-ND).

Publisher

Elsevier

Volume

39

Peer Reviewed

yes

Keywords

Global warming, Geo rent, Hotelling, Carbon budget, Fossil resources, Renewable energy