Climate policies as a hedge against the uncertainty on future oil supply

Abstract

Despite the inextricable link between oil scarcity and climate change (Toman 2002;Brown and Huntington 2008;Huntington and Brown 2004;Turton and Barreto 2006), the interplay between these two issues is paradoxically lacking a quantified analysis within a macroeconomic framework.This Climatic Change Letter uses a global energy-economy model to address this gap by assessing in a common framework both the costs of climate policies and oil scarcity, taking into account macroeconomic feedbacks.It shows that both costs are of the same order of magnitude.Moreover, our results suggest that, in the context of a limited and uncertain amount of ultimately recoverable oil resources, climate policies reduce the world vulnerability to peak oil.Of course, specific policies could also reduce this vulnerability.But by shifting energy use toward coal, they would lead to soaring greenhouse gases emissions.Climate policies, instead, can yield benefits from both sides: avoiding dangerous climate change (Mastrandrea and Schneider 2004) and hedging against the uncertainty on oil resources.The amount of recoverable oil is extremely uncertain, and yet the world economy highly depends on it.Nevertheless, it is barely the only uncertain factor that may have a significant impact on all economies in the future.Major sources of uncertainty include, inter alia, future investments to sustain oil production; the strategy of Middle-East oil producers that have a significant market power in the oil market; future coal prices; the ability of synfuels (biofuels and coal-to-liquid) to penetrate energy

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