The Impact of Carbon Taxes on the Value of Fossil-Fuel Reserves and the Efficiency of Climate Policy

The present study analyzes the impact of carbon pricing along with other policies on the value of fossil fuel resources, CO2 emissions, and economic welfare. It employs a model based on the Hotelling analysis of resource values and calibrates this approach to data on fossil resources, costs, demands, and CO2 emissions. Total fossil-fuel resource rents are estimated to be $17 trillion (2021 US$) without carbon pricing. Oil and gas rents are unchanged for low carbon taxes but would decline by 40% with a $100/tCO2 price. The losses in producer values would be only about 10% of the carbon tax revenues. The study also shows that other policies – such as ones involving ethical investing or subsidies for renewable energy – are very inefficient and poor substitutes for carbon pricing.