Charles Mason, University of Wyoming: "Fossil Fuel Reserve Development Under Carbon Pricing"

(with Andrew Leach)

Both academic research and policy analysis has argued that a cessation of oil and natural gas field development is consistent with measures to meet aggressive climate targets. A mounting chorus demands that fossil fuels be left in the ground. While resource economics commonly treats reserve creation and production as sequential economic decisions, few papers assessing climate change policies treat reserves as endogenous. Our paper highlights reserve development as an important channel through which cumulative emissions will be affected by greenhouse gas policies. We show that while emissions pricing reduces emissions, extraction rates, and reserves, other policy parameters can distort these effects in important ways. Design attributes common in emissions pricing policies such as output-based allocations of emissions credits create distortions that are propagated through changes in reserve development decisions and may increase emissions. We also discuss how abatement technology alters the cost of complying with policies meant to reduce GHG emissions and thus changes reserve development and eventual emissions. We argue that reduced-form models which treat reserves as pre-determined are likely to incorrectly estimate the emissions impacts of GHG emissions policy changes.