Working papers
The Transition to Carbon Capture and Storage Technologies
(with Rolf Golombek, Mads Greaker and Snorre Kverndokk, 2020)
Abstract
We model the value chain of Carbon Capture, transport and Storage (CCS) by focusing on the decisions taking by actors involved in either capture, transport or storage of CO2. Plants emitting CO2 are located along a Salop circle. If these invest in carbon capture facilities, the captured CO2 is transported to terminals, which again transport the received amount of CO2 to a storage site. We study different market structures, all suffering from market imperfections such as network effects, market power and economics of scale in addition to the environmental externality from emissions. Thus, to ensure socially optimal CCS investments, the government must use more than one policy instrument. A numerical specification of the model finds that the actually observed CCS investments are much lower than what is socially optimal simply because the price of CO2 emissions has been far too low. If the carbon tax is set equal to the social cost of carbon and is sufficiently high to justify CCS investments, but the government does not use other instruments to correct for the other market imperfections, CCS investments differ significantly between the alternative market structures. In particular, investment in terminals may be too high, while investment in capture facilities could still be too low.
(with Rolf Golombek, Mads Greaker and Snorre Kverndokk, 2020)
Abstract
We model the value chain of Carbon Capture, transport and Storage (CCS) by focusing on the decisions taking by actors involved in either capture, transport or storage of CO2. Plants emitting CO2 are located along a Salop circle. If these invest in carbon capture facilities, the captured CO2 is transported to terminals, which again transport the received amount of CO2 to a storage site. We study different market structures, all suffering from market imperfections such as network effects, market power and economics of scale in addition to the environmental externality from emissions. Thus, to ensure socially optimal CCS investments, the government must use more than one policy instrument. A numerical specification of the model finds that the actually observed CCS investments are much lower than what is socially optimal simply because the price of CO2 emissions has been far too low. If the carbon tax is set equal to the social cost of carbon and is sufficiently high to justify CCS investments, but the government does not use other instruments to correct for the other market imperfections, CCS investments differ significantly between the alternative market structures. In particular, investment in terminals may be too high, while investment in capture facilities could still be too low.
Optimal Asset Allocation for Commodity Sovereign Wealth Funds
(with Alfonso Irarrazabal, BI Norwegian Business School and Juan Parra-Alvarez, Aarhus University; 2020)
Abstract
This paper studies the dynamic asset allocation problem faced by an infinitively-lived commodity-based sovereign wealth fund under incomplete markets. Since the non-tradable stream of commodity revenues is finite, the optimal consumption and investment strategies are time dependent. Using data from the Norwegian Petroleum Fund, we find that the optimal demand for equity should decrease gradually from 60 to 40 percent over the next 60 years. However, the solution is particularly sensitive to the correlation between oil and stock price changes. We also estimate wealth-equivalent welfare losses, relative to the optimal rule, when following alternative suboptimal investment rules.
(with Alfonso Irarrazabal, BI Norwegian Business School and Juan Parra-Alvarez, Aarhus University; 2020)
Abstract
This paper studies the dynamic asset allocation problem faced by an infinitively-lived commodity-based sovereign wealth fund under incomplete markets. Since the non-tradable stream of commodity revenues is finite, the optimal consumption and investment strategies are time dependent. Using data from the Norwegian Petroleum Fund, we find that the optimal demand for equity should decrease gradually from 60 to 40 percent over the next 60 years. However, the solution is particularly sensitive to the correlation between oil and stock price changes. We also estimate wealth-equivalent welfare losses, relative to the optimal rule, when following alternative suboptimal investment rules.
The Effect of Income Shocks on the Oil Price
(with Alfonso Irarrazabal, BI Norwegian Business School)
Abstract
This paper identifies the effect of income shocks on the real price of oil. We find that for the period 1973-2016 shocks to world GDP created a response of a permanent rise in the oil price. In contrast, oil production does not correct the disequilibrium from a stable long-run equilibrium. Whereas shocks to GDP are persistent, shocks to the oil price are mostly transitory once we control for changes in world GDP and oil production. We find evidence of a structural change in the response of the oil price after 1973. We conjecture that the response of oil production is key to the differences.
(with Alfonso Irarrazabal, BI Norwegian Business School)
Abstract
This paper identifies the effect of income shocks on the real price of oil. We find that for the period 1973-2016 shocks to world GDP created a response of a permanent rise in the oil price. In contrast, oil production does not correct the disequilibrium from a stable long-run equilibrium. Whereas shocks to GDP are persistent, shocks to the oil price are mostly transitory once we control for changes in world GDP and oil production. We find evidence of a structural change in the response of the oil price after 1973. We conjecture that the response of oil production is key to the differences.
Optimal Asset Allocation for Commodity Sovereign Wealth Funds
(with Alfonso Irarrazabal, BI Norwegian Business School; 2018)
Abstract
This paper solves a dynamic asset allocation problem for a commodity sovereign wealth fund under incomplete markets. We calibrate the model using data from three countries: Norway, UAE and Chile. In our benchmark calibration for Norway, we find that the fund’s manager should initially invest all her wealth to stock and reduce this fraction gradually over time. We find that the solution is particularly sensitive to the assumption about the volatility of commodity prices. The solution for Chile implies that for relatively high risk aversion coefficients the manager should start at a small fraction of her wealth to increase later over the life cycle of the fund.
(with Alfonso Irarrazabal, BI Norwegian Business School; 2018)
Abstract
This paper solves a dynamic asset allocation problem for a commodity sovereign wealth fund under incomplete markets. We calibrate the model using data from three countries: Norway, UAE and Chile. In our benchmark calibration for Norway, we find that the fund’s manager should initially invest all her wealth to stock and reduce this fraction gradually over time. We find that the solution is particularly sensitive to the assumption about the volatility of commodity prices. The solution for Chile implies that for relatively high risk aversion coefficients the manager should start at a small fraction of her wealth to increase later over the life cycle of the fund.
Importance of Demand and Supply Shock for Oil Price Variations
Abstract
This paper studies the importance of demand and supply shocks in the oil market, and tries to explain the formation of the short-run oil price by applying an extended commodity storage model to the cyclical components of the price. First, I employ a multivariate method to extract the cyclical component of the oil price, world oil consumption, and global GDP. Next, I find a large and positive effect of global GDP shock on the oil price cycles in a VAR model. Then, I estimate the commodity storage model using a moment-matching method. All parameters are estimated significantly, and the model shows good capability of reproducing the volatility and persistence of oil price cycles. I find that the GDP shock generates a much more moderate effect on the oil price cycles in the extended commodity storage model than the empirical evidence from the VAR analysis, and the production shock plays an important role for the variance of the cyclical component of the oil price.
Abstract
This paper studies the importance of demand and supply shocks in the oil market, and tries to explain the formation of the short-run oil price by applying an extended commodity storage model to the cyclical components of the price. First, I employ a multivariate method to extract the cyclical component of the oil price, world oil consumption, and global GDP. Next, I find a large and positive effect of global GDP shock on the oil price cycles in a VAR model. Then, I estimate the commodity storage model using a moment-matching method. All parameters are estimated significantly, and the model shows good capability of reproducing the volatility and persistence of oil price cycles. I find that the GDP shock generates a much more moderate effect on the oil price cycles in the extended commodity storage model than the empirical evidence from the VAR analysis, and the production shock plays an important role for the variance of the cyclical component of the oil price.