Simulation of Subsoil Fuel Asset Values under Uncertainty

The oil, natural gas, and coal rents are calculated endogenously in ENVISAGE. The resource rent is what is paid to the “flow” of the natural resource as it is transferred from the ground into the economy. In keeping with SEEA/SNA and CWON principles, unit resource rents are the difference between the market price and all variable costs—intermediate inputs, labor, and normal profits. Because ENVISAGE was calibrated to 2014, the asset values in 2018 that are calculated by the model deviate from those estimated in CWON for 2018. To facilitate comparison of results, the trajectory of rents attributed to oil, gas, and coal assets from ENVISAGE is normalized to the corresponding 2018 rent values estimated in the CWON and used to simulate the changes in resource rents over time. This method combines the comparative advantage of the CWON/SEEA methodology in estimating asset values in the past with the comparative advantage of the modeling approach to simulate alternative futures. Further details on ENVISAGE can be found in the underlying CWON technical report and online.5

The goal of model simulation is not to predict the future value of the fossil fuel assets but to explore a range of alternative plausible policy futures. A set of exploratory scenarios represents uncertainty about how the key drivers of asset values will evolve. The simplest way to represent deep uncertainty is to build alternative scenarios from several combinations of a range of potential external impacts and strategic national policy choices. Constructing a range of future scenarios provides an opportunity to identify policy and asset management decisions that make the portfolio value robust to external shocks under the plausible worst-case futures. For clarity of argument, the range of scenarios has been limited and does not pretend to represent all plausible futures. A wider range of policy pathways to a low-carbon transition can be found in Mercure et al. (2018); Peszko, van der Mensbrugghe, and Golub (2020); and Van der Ploeg and Rezai (2019). The worst-case scenarios simulated were identified by ramping up the level of ambition of cooperative and noncooperative climate policies, respectively, until the CGE model could find an equilibrium solution. This can be interpreted as the numerical limit of the current model specification or the limits to the growth-focused neoclassical economics.

This study focuses on the distribution of risk to fossil fuel wealth across fuels and country groups and explores whether this distribution depends on the policy pathways to a low-carbon economy. Such a focus can inform the political economy of international cooperation on climate change. A set of unique narratives has been developed to underpin scenarios of alternative policy pathways toward the goals of the Paris Agreement. These narratives stress two critical dimensions of low-carbon transition: (1) whether it will be smooth and cooperative or disorderly and unilateral, and (2) whether noncooperation will be punished by border carbon adjustment measures or not. These narratives were first elaborated in Peszko et al. (2020) and were tailored specifically for this chapter to be