Abstract
Besides affecting oil rents, climate policy can have far-reaching capital market implications. We identify a new general equilibrium transmission channel of climate policy on oil extraction by an oil monopolist who accounts for the influence of oil supply on returns on own petrodollar-financed capital assets. Climate-policy-induced adjustments in capital asset holdings by the exporting country lead to postponement of extraction under a wide range of reasonable parameter settings: for the reference calibration present extraction drops by 1.28 percent for an ad valorem tax corresponding to 100$ per ton of carbon, while it increases by 0.52 percent for a competitive oil market. This contrasts with the literature on supply-side effects of climate policy which neglects these capital market implications. Concerns about carbon taxes arising from unintended climate-damaging supply reactions are alleviated.
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