The Impact of Climate Policy on Oil and Gas Investment: Evidence from Firm-Level Data

TheImpactofClimatePolicyonOilandGasInvestment EvidencefromFirm-LevelData ChristianBogmans,AndreaPescatori,ErvinPriftiWP/23/140 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 JUN ©2023InternationalMonetaryFundWP/23/140 IMFWorkingPaper ResearchDepartment TheImpactofClimatePolicyonOilandGasInvestment:EvidencefromFirm-LevelData PreparedbyChristianBogmans,AndreaPescatori,ErvinPrifti* AuthorizedfordistributionbyPetyaKoevaBrooks June2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Usingatext-basedfirm-levelmeasureofclimatepolicyexposure,weshowthatclimatepolicieshaveledtoaglobaldeclineof6.5percentininvestmentamongpubliclytradedoilandgascompaniesbetween2015and2019,withEuropeancompaniesexperiencingthemostsignificantimpact.Similarly,climatepolicyuncertaintyhasalsohadanegativeimpact.ResultssupporttheNeoclassicalinvestmentmodel,whichpredictsapre-emptivecutininvestmentinreactiontodownwardshiftsinprospectivedemand,incontrastwiththe“greenparadox”thatpredictsanincreaseincurrentinvestmenttoshiftproductiontowardthepresent. JELClassificationNumbers: C2,D2,Q4,Q54 Keywords: Fossilfuelphaseout;ParisAgreement;energytransition;DiD Author’sE-MailAddress: apescatori@imf.org;cbogmans@imf.org;eprifti@imf.org *TheauthorswouldliketothankPetyaKoevaBrooks,GitaGopinath,Pierre-OliverGourinchas,RobHart,GerardvanderMeijden,MarcosPoplawskiRibeiro,BalazsStadler,MartinStuermer,andCeesWithagenfortheirvaluablesuggestions,andRachelBrasierandWenchuanDongfortheirexcellentresearchassistance.WeareparticularlygratefultoMehdiBenatiyaAndaloussiforhispreciouscontributiontothiswork. WORKINGPAPERS TheImpactofClimatePolicyonOilandGasInvestment EvidencefromFirm-LevelData PreparedbyChristianBogmans,AndreaPescatori,ErvinPrifti1 1TheauthorswouldliketothankPetyaKoevaBrooks,GitaGopinath,Pierre-OliverGourinchas,RobHart,GerardvanderMeijden,MarcosPoplawskiRibeiro,BalazsStadler,MartinStuermer,andCeesWithagenfortheirvaluablesuggestions,andRachelBrasierandWenchuanDongfortheirexcellentresearchassistance.WeareparticularlygratefultoMehdiBenatiyaAndaloussiforhispreciouscontributiontothiswork. 1Introduction Asmoothenergytransitionwillrequiremovingawayfromfossilfuelsatapacethatiscommensuratewiththeadoptionofrenewableenergy.Thischallengingbalancingactiscomplicatedbytheforward-lookingnatureofenergyinvestmentandtheintertemporaldi-mensionofextractiondecisions,bothofwhichmakeitdifficultforcompaniesandinvestorstogaugefuturerevenuestreamsinapotentiallyradicallytransformedenvironment.Thisposesatransitionriskthatisspecifictoeachcompanyandsector,butthatformostoilandgascompaniesrepresentsadownside(potentiallyexistential)risk—thatis,theymayexperienceasubstantialfallinrevenuesandinthevalueoftheir(physicalandfinancial)as-sets(seevanderPloegandRezai(2020)andCampiglioandvanderPloeg(2022)).Thesecompaniesare,infact,highlyexposedtoclimatetransitionandchangesinclimatepolicies.Thecurrentpaper,usingfirm-leveldata,focusesonunderstandingtheimplicationsofthisexposureforinvestmentbypublicly-tradedoilandgasfirms. Weemployfirm-levelmeasuresofclimatepolicyexposureandclimatepolicyrisk,whicharederivedfromtextanalysisconductedbySautneretal.(2023),assourcesofplausibleexogenousvariationincompanies’investments,whichareinfluencedbybothcurrentandexpectedclimatepolicies.Thesemeasuresarebasedontranscriptsofearningcallsofpublicly-listedfirmswhichareanalyzedusingmachinelearningandkeyworddiscoveryalgorithmstoidentifyclimatechangeconversations.Theexposuremeasureshouldcapturerevisionsinexpectationsofclimatepoliciesandtheirimpactonthefirm’sprofitabilitywhiletheriskmeasureshouldreflecttheassociateduncertainty. Using117publiclytradedoilandgasfirms(accountingforabout40percentofglobaloilproduction)andacontrolgroupmadeupbynon-energyfirms,apanelregressionshowsthataonestandarddeviationincreaseinexposuretoclimatepolicyleadstoareductionofaround3percentininvestmentinatypicaloilandgascompany.Climatepolicyriskhasanevenstrongereffectthanexposure(i.e.,thefirstmoment),withatypicalshockinuncertaintyreducinginvestmentbyaround4percent.Forthecontrolgroup,instead,aonestandard deviationincreaseinclimatepolicyexposureincreasesinvestmentby4.9percent—fornon-fossilfuelfirms,climatetransitionmay,onaverage,implymoreopportunitiesthanthreats.Theseeffectsarealsoeconomicallymeaningful.Ourestimates,whenaggregatedacrossfirms,implythatupstreamoilandgasinvestmentfellby6.5percentbetween2015and2019asaresultofastrengtheningofclimatepolicypledgesandannouncements.Abatteryofrobustnesschecksconfirmthemainresults. Adifference-in-differenceanalysis(DiD)around2015alsosupportstheviewthattheParisagreementhasconstitutedawatershedmomentfortheoilandgasindustry.Infact,capitalexpenditu