Divestment prevails over the green paradox when anticipating strong future climate policies

Abstract

Fossil fuel market dynamics will have a significant impact on the effectiveness of climate policies. 1 Both fossil fuel owners and investors in fossil fuel infrastructure are sensitive to climate policies that threaten their natural resource endowments and production capacities 2-4 , which will consequently affect their near-term behaviour. Although weak in near-term policy commitments 5,6 , the Paris climate agreement 7 signalled strong ambitions in climate change stabilisation. Many studies emphasise that the 2°C target can still be achieved even if strong climate policies are delayed until 2030. 8-10 However, sudden implementation will have severe consequences for fossil fuel markets and beyond and these studies ignore the anticipation effects of owners and investors. Here we use two energy-economy models to study the collective influence of the two central but opposing anticipation arguments, the Green Paradox 11 and the Divestment effect 12 , which have to date only been discussed separately. For a wide range of future climate policies we find that anticipation effects, on balance, reduce CO2 emissions during the implementation lag. This is because of strong divestment in coal power plants starting ten years ahead of policy implementation. The Green Paradox effect is identified, but is small under reasonable assumptions.

Fossil fuel supply and climate policy: exploring the road less taken

“…Finally, supply-constraining policies may help to counteract the potential for resource owners-anticipating increasingly stringent future carbon policies and prices-to accelerate production in the near term, as suggested by Sinn's Bgreen paradox^ (Sinn 2008), though some also question the overall strength of this effect (Bauer et al 2018).…”

A new perspective on global renewable energy systems: why trade in energy carriers matters

“…65 Actors who produce, process and transport fossil fuels face the risk of huge stranded investments due to a full decarbonization of energy systems in the coming decades. 66 This causes weaker incentives and less commitments to mitigate climate change. Such stranded investments could be partly avoided if the existing infrastructure serves as a bridge to a low-carbon world.…”

Climate finance and disclosure for institutional investors: why transparency is not enough

“…Analyses exploring the role of investors' expectations with a focus on how these expectations will shape future low-carbon pathways are currently missing, but they seem to be crucial to re-orient institutional finance towards lowcarbon projects. To the best of our knowledge, a few scholars have investigated numerically divestment from carbon-intensive assets induced by the introduction of new climate policies (Bauer et al 2018;Schellnhuber et al 2016;Johnson et al 2015); however, none has tried yet to incorporate investors' expectations on decarbonisation patterns into modelling projections.…”