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The Shadow of Uncertainty: Climate Policy and the Value of Petroleum Resources

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We study how uncertainty about future climate policy affects the valuation of oil resources. Using a structural model of extraction and exploration applied to field-level data from the Norwegian Continental Shelf, we estimate the impact of climate policy uncertainty (CPU) on the shadow prices of both discovered and undiscovered oil. We find that higher CPU lowers these marginal values, especially after the 2015 Paris Agreement, reducing incentives to extract and explore. This decline translates into an implicit carbon cost of $15–$38 per tonne of carbon dioxide emitted. Unlike a Pigouvian tax, this shadow cost does not scale with emissions intensity or generate fiscal revenue. As a result, it reduces production and emissions in a diffuse and economically inefficient manner, without rewarding low emitters or financing green transition policies.

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  • Ringstad, Ingrid Emilie Flessum & Benini, Giacomo & Dotti, Valerio & Tselika, Kyriaki, 2025. "The Shadow of Uncertainty: Climate Policy and the Value of Petroleum Resources," Discussion Papers 2025/22, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2025_022
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    1. Pesaran, M Hashem, 1990. "An Econometric Analysis of Exploration and Extraction of Oil in the U.K. Continental Shelf," Economic Journal, Royal Economic Society, vol. 100(401), pages 367-390, June.
    2. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
    3. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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