Fossil Fuel Reserve Development Under Carbon Pricing

Academic research and institutional scenario analysis has identified changes in fossil fuel reserve development to be an important precursor to global climate change mitigation, with a mounting chorus demanding that fossil fuels be left in the ground. Nevertheless, resource economists have generally avoided modeling endogenous reserve creation in the context of climate change. 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.