Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: Despite ambitious climate goals and already substantial stocks of developed fossil en- ergy reserves, development of new fossil energy reserves continues to be high. This raises concerns, as it reinforces the fossil industry’s opportunities and incentives to continue ex- traction, and may necessitate abandonment of developed fossil reserves to meet climate targets. In this paper, we analyze the energy transition, considering fossil exploration and development activities. We provide conditions for when the fossil industry will abandon reserves, and establish that continued exploration of fossil resources is not incompatible with abandoning developed reserves. The first-best implementation of a carbon budget al- ways involves reserve abandonment, and thus exploration that pushes developed reserves in excess of the remaining budget. A quantitative assessment reveals that a volume equal to 9-19% of current oil and gas reserves are optimally abandoned, and that, even under a 1.5◦C warming target, positive exploration of new reserves is justified for another decade.

Keywords: carbon budget; energy transition; fossil exploration; nonrenewable resources; renewable energy; stranded assets

JEL-codes: Q21; Q31; Q35; Q54; Q58

44 pages, August 2020

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