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The oil and gas industry’s behavior in front of climate policy

English title The oil and gas industry’s behavior in front of climate policy
Applicant Daubanes Julien
Number 192578
Funding scheme Project funding (Div. I-III)
Research institution Geneva School of Economics and Management Université de Genève
Institution of higher education University of Geneva - GE
Main discipline Economics
Start/End 01.04.2020 - 31.03.2023
Approved amount 409'774.00
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Keywords (4)

Oil and gas industry; Reserve investments; Political influence; Effectiveness of climate policy

Lay Summary (French)

Lead
L'objectif des engagements actuels contre le changement climatique est de limiter la hausse des températures à moins de 2 degrés Celsius. Il en résulte un "budget carbone" : le montant maximum d'émissions que la société ne pourra excéder sans remettre en question l'objectif des 2 degrés.Or les efforts actuels de l'industrie pour développer de nouvelles réserves de pétrole et de gaz semblent incompatibles avec le budget carbone.
Lay summary

Ces efforts sont inquiétants pour deux raisons : si les réserves actuellement développées sont effectivement exploitées, ceci compromettra la lutte contre le changement climatique ; si elles ne le sont pas, ceci aura des conséquences financières importantes sur la capitalisation du secteur ("bulle carbone").

Clairement, les investissements actuels de l'industrie dépendent de la crédibilité des engagements environnementaux des gouvernements. En même temps, les efforts d'influence notoires du secteur pétrolier sont de nature à fragiliser cette crédibilité politique.

Ce projet vise à utiliser les outils de l'analyse économique pour comprendre cette situation et ses implications pour la politique environnementale. Les investissements actuels du secteur pétrolier permettent-ils de conclure que ce secteur parie sur un échec de la politique climatique? L'industrie tend-t-elle à se défendre lorsque la politique climatique devient plus ambitieuse? Dans ce cas, faut-il réguler directement les investissements du secteur pétrolier et limiter son influence politique?

Direct link to Lay Summary Last update: 29.07.2020

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Abstract

In the face of the climate problem, current international policy commitments-such as the Paris Agreement-aim at limiting the average rise in temperature below two degrees. Climate experts established that this objective implies a “carbon budget” (IPCC, 2018)-a limit to cumulative CO2 emissions that can be emitted worldwide. However, already existing fossil fuel reserves of top oil and gas firms exceed this budget (McGlade and Ekins, 2015), which means that their exploitation is incompatible with current climate policy objectives. Moreover, oil and gas companies’ current and planned investments in the development of additional reserves will turn unprofitable if governments’ climate policy commitments are ultimately met (Carbon Tracker, 2019).There are two main possible reactions to this apparently unsustainable situation. The first one is to assume that climate policy objectives will effectively be achieved. In that case, one must conclude that oil and gas companies do not rationally integrate the incidence of climate policy on their business, which will ultimately lead to a possibly drastic readjustment on financial markets. This possible “carbon bubble” is receiving the attention of financial regulators-see, among others, Weizig et al. (2014) and Batten et al. (2016).The second reaction is to assume that the oil and gas industry rationally anticipates that climate policy objectives will not be met. In other words, the industry might invest in additional reserves because it believes that these reserves will be exploited, despite public policies. For example, according to Cocquemas et al. (2019), financial decisions reveal an anticipated probability of climate action of only 51%. This view is substantiated by the large lobbying expenditures made by the oil and gas sector to influence the policy making process.To understand the apparently unsustainable investments of the oil and gas sector, this project seeks to examine the relationships between oil and gas investments, the political influence of the oil and gas sector, and the expected effectiveness of climate policy.We will address the following questions, among others: What are the determinants of investments in additional oil and gas reserves? How these investments relate to market expectations about climate policy? Do oil and gas companies try to defend their business by influencing the policy making process?Our approach consists of three main steps:1) a formal model of natural resource sectors, their investments in reserve development and in political influence, the climate risk (i.e., market expectations of policy effectiveness), and their financial valuation;2) empirical tests of relationships between these variables using data on large oil and gas companies’ stock prices, investments, lobbying expenditures, and measures of the financial climate risk;3) an empirical examination of the impacts of the Paris Agreement to assess the effectiveness of climate policy.
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