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

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We study how perceived uncertainty associated with future decarbonization policy affects the valuation and management of oil resources. We develop a novel Climate Policy Uncertainty (CPU) index for Norway and embed it within a structural model of extraction and exploration, estimated using field-level data from the Norwegian Continental Shelf. Our findings indicate that elevated policy risk reduces the shadow prices of both discovered and undiscovered oil reserves, especially in the period following the 2015 Paris Agreement, thereby weakening incentives to extract and explore. This decline corresponds to an implicit average carbon cost of approximately $6 per tonne of carbon dioxide, reaching up $24 per tonne of carbon dioxide. Unlike a Pigouvian tax, this implicit cost does not scale with emissions intensity or generate fiscal revenue, resulting in a diffuse and economically inefficient reduction in fossil fuel production and emissions and a net welfare loss.

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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, revised 01 Sep 2025.
    • Handle: RePEc:hhs:nhhfms:2025_022
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    1. De Boeck, Paul & Bakker, Marjan & Zwitser, Robert & Nivard, Michel & Hofman, Abe & Tuerlinckx, Francis & Partchev, Ivailo, 2011. "The Estimation of Item Response Models with the lmer Function from the lme4 Package in R," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 39(i12).
    2. 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.
    3. 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.
    4. 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.
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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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