The Shadow of Uncertainty: Climate Policy and the Value of Petroleum Resources

Abstract

We study how perceived uncertainty associated with future decarbonization policy affects the valuation and management of oil resources. We develop a novel Climate Policy Uncertainty (CPU) index for Norway and embed it within a structural model of extraction and exploration, estimated using field-level data from the Norwegian Continental Shelf. Our findings indicate that elevated policy risk reduces the shadow prices of both discovered and undiscovered oil reserves, especially in the period following the 2015 Paris Agreement, thereby weakening incentives to extract and explore. This decline corresponds to an implicit average carbon cost of approximately USD 6 per tonne of carbon dioxide, reaching up USD 24 per tonne of carbon dioxide. Unlike a Pigouvian tax, this implicit cost does not scale with emissions intensity or generate fiscal revenue, resulting in a diffuse and economically inefficient reduction in fossil fuel production and emissions and a net welfare loss