The Effect of Environmental Policies and Market Uncertainty on the Oilsands Rate of Expansion
30 Pages Posted: 1 Mar 2013
Date Written: February 28, 2013
Abstract
The Canadian oilsands hold a massive oil reserve. However, the extraction of the oil comes at a significant environmental cost. We develop a real-options model to evaluate the rate of oilsands expansion, while accounting for oil price uncertainty, in a multi-agent setting. As new plants come online, labour costs will increase for all oilsands companies. Thus, the optimal actions of the agents are interwoven. We consider three environmental cost scenarios: the first is based on the current government policy where we expect the environmental taxes to be increased over time to account for the true cost of environmental damage; the second is based on a policy where the true cost of environmental damage is captured at all times, and we assume that this cost will decrease as technology improves; and the third is based on a policy where the environmental tax starts at the current level, is increased at a rapid rate to capture the true environmental cost, then decreases as technology improves. Our model also accounts for full and partial carbon tax policies, where the partial policy provides tax exemptions at specified emissions levels, which may lead to agents running their plants at a reduced capacity. Our results show that a stricter environmental cost scenario delays investment, but leads to a higher rate of expansion once investment begins. Once constructed, oil prices need to drop drastically for the plants to shut down. A partial carbon tax policy leads to an increase in the number of plants coming online, sooner.
Keywords: OR in natural resources, Irreversible investment, Real options, Oilsands
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