Carbon Taxes and Stranded Assets: Evidence from Washington State

The climate challenge requires ambitious climate policy. A sudden increase in carbon prices can lead to major shocks to the stock market. Some assets will lose part of their value, others all of it, and hence become “stranded”. If the markets are not ready to absorb the shock, a financial crisis could follow. How well investors anticipate, and thus how large these shocks may be, is an empirical question. We analyze stock market reactions to the rejection of two carbon tax initiatives by voters in Washington state. We build proper counterfactuals for Washington state firms and find that these modest policy proposals with limited jurisdiction caused substantial readjustments on the stock market, especially for carbon-intensive stocks. Our results reinforce concerns about “stranded assets” and the risk of financial contagion. Our policy implications support the inclusion of transition risks in macroprudential policymaking and carbon disclosure and climate stress tests as the main policy responses

Climate Policy and Resource Extraction with Variable Markups and Imperfect Substitutes

In a resource extraction model that features imperfect substitution and endogenous market power, we analytically characterize the effect of anticipated future demand shocks on the resource extraction path. We show that the resource owner's market share and reserves-to-extraction ratio are sufficient to calculate the supply response under constant elasticity of substitution between alternative energy resources. The analytical characterization of the extraction response allows us to conduct scenario analyses based on available oil market data. Applying data on OPEC, we find a relatively small increase in current extraction due to an anticipated decrease in the price of alternative energy resources, which implies that endogenous markup adjustments of OPEC countries largely reduce the adverse consequences of anticipated climate policies due to intertemporal carbon leakage

Corporate governance, environmental regulations, and technological change

This paper investigates the relationship between environmental regulations and innovation by focusing on the automobile industry in a cross-country setting. We provide empirical evidence that the presence of agency problems mitigates the negative effects of environmental regulations on overall R&D activity, which leads to full compensation when the degree of agency problems is sufficiently high. Guiding our empirical analysis, we provide a general model consistent with the structure of existing ownership data. Specifically, we model ownership structure as a combination of two extreme corporate governance types. On the one extreme there are profit maximizers, and on the other extreme there are managers who are only concerned with their private benefits. The model leads to a simple country level ownership indicator and shows that if an economy is dominated by firms with higher agency problems, then pollution tax might even increase overall R&D, while reducing pollution. According to our estimations, such an outcome is possible only for out-of-sample values of the ownership indicator, where the degree of agency problems is extremely high

Replication Data for: Climate Policy and Resource Extraction with Variable Markups and Imperfect Substitutes

Code and data for Climate Policy and Resource Extraction with Variable Markups and Imperfect Substitutes, by Malik Curuk and Suphi Sen. See readme.pdf for detailed instructions

The effectiveness of taxing the carbon content of energy consumption

We estimate the long-run effect of a broad-based carbon tax on energy consumption by using a new and unique cross-sectional dataset of effective energy tax rates of OECD countries. Our instrumental variables estimations, which exploit the positive correlation between the tax rates of neighboring countries, indicate a much higher effectiveness for carbon taxation than those from ordinary least square estimations. The validity of our identification strategy is consistent with the theories of strategic policy interaction in the presence of immobile tax bases. Our results show that a one euro increase in energy taxes reduces carbon emissions from fossil fuel consumption by 0.73 percent in the long run. (C) 2018 Elsevier Inc. All rights reserved

Climate policy, stranded assets, and investors’ expectations

Climate policies to keep global warming below 2°C might render some of the world's fossil fuels and related infrastructure worthless prior to the end of their economic life time. Therefore, some energy-sector assets are at risk of becoming stranded. This paper investigates whether and how investors price in this risk of asset stranding. We exploit the gradual development of a German climate policy proposal aimed at reducing electricity production from coal and analyze its effect on the valuation of energy utilities. We find that investors take stranded asset risk into consideration, but that they also expect a financial compensation for their stranded assets

Energy taxation in OECD countries: Effective tax rates across countries, users, and fuels

Energy use, while critical for modern economies and lifestyles, can have significant environmental consequences through emissions of CO2 and local air pollutants. Taxes on energy are a key tool available to governments by which they can influence energy use, and consequently emissions of CO2 and local air pollutants from energy use. Energy taxes, in particular, if levied on fossil fuel tax bases, implicitly tax these pollutants. Since energy taxes can send important price signals that influence energy consumption patterns, energy taxation is often used by governments to reduce emissions (Vollebergh 2012; Parry et al. 2012, 2014; OECD 2013b). Taxes on energy are in fact an important source of government revenue. In some countries these revenues are even earmarked for specific purposes like road infrastructure or non–fossil-fuel support measures. Understanding the structure and level of energy taxes in a country is therefore central to policy discussions regarding energy use. Given the centrality of energy to the economy and the environment, such an understanding is a key reference point for consideration of how policy can best support green growth (OECD 2009)

Stranded Assets: Research Gaps and Implications for Climate Policy

Many types of capital stocks—natural, physical, and human—stand to lose value because of climate policy and to become “stranded.” The owners of such assets will resist climate policies. We survey the recent climate economics literature and highlight research gaps related to stranded assets. In line with recent literature in political science, we argue that economists can provide more effective policy recommendations by putting greater emphasis on the distributional consequences of asset stranding. Our recommended policies focus on targeting new capital stocks related to energy production and consumption: banning fossil-intensive investment and encouraging investment into renewable and energy-efficient capital. These policies may face less resistance than price-based mechanisms and could improve the credibility of future carbon pricing