Petrodollar Recycling, Oil Monopoly, and Carbon Taxes

We identify a new general equilibrium transmission channel of climate policy on oil extraction, assuming an oil monopolist who accounts for the implications of oil supply on her capital asset returns. Policy-induced adjustments in asset holdings lead to postponement of extraction under a wide range of reasonable parameter settings: present extraction can drop considerably for a moderately high carbon tax. For endogenous exploration, a decrease in first-period extraction and in cumulative extraction at the same time is also possible. This contrasts with the literature on supply-side effects of climate policy which neglects these capital market implications. Concerns about carbon taxes arising from impeding climate-damaging supply reactions are alleviated, while taxing asset returns may induce acceleration of extraction.