Climate policies and the extractive investments of oil and gas firms

It is widely acknowledged that oil and gas firms’ investment plans are largely incompatible with the Paris Agreement, yet empirical evidence on how climate policies influence their extraction behavior remains scarce. This contribution assesses the impact of climate policies on the investments of oil and gas firms using a large international firm-level panel. The identification strategy leverages an econometric model of corporate investments in exploration and production activities (E&P), integrating internationally harmonized data on the tightening of climate policy instruments and information on the geographic distribution of companies’ upstream assets. The main findings reveal a strongly heterogeneous firm-level response across policy instruments and firm types. Globally, due to incomplete carbon pricing mechanisms, firms with domestic upstream oil and gas assets have adjusted to the strengthening of national renewable energy subsidy policies by accelerating extractive investments over the long run. In contrast, domestic European firms’ E&P investments have been strongly and durably negatively impacted by the tightening of national commitments to phase out fossil fuel heating systems in buildings. European and North American international firms react to the tightening of carbon pricing instruments by reducing E&P investments, consistent with managers adjusting their internal price of carbon upward. However, these effects are short-lived, indicating that their internal price of carbon is set too low to durably shift them away from fossil fuel extraction. Furthermore, while many international oil and gas firms own renewable energy segments, there is limited evidence that the strengthening of renewable energy subsidy policies shifts them away from fossil fuel extraction.