is compared with unilateral carbon taxes applied by LCT pioneers without border adjustment taxes (the best-case scenario for both coal and gas rents).

What unites all fossil fuel owners is their preference for traditional diversification. All benefit from fossil fuel subsidies, though at the expense of consumers and the rest of the economy as we have seen before. This is not surprising: subsidies to the fuel input costs of the extractive sectors’ clients increase domestic sales and revenues of extractive sectors, partly compensating for the shrinking export markets due to the high carbon taxes in export markets. Traditional diversification partly mitigates the negative impact of low carbon transition on asset value in all extractive sectors, with coal and gas benefitting more than oil. Asset diversification, in turn, threatens all fuel extractive industries because it transfers resource rents from energy-intensive to knowledge-intensive sectors.

However, the impact of carbon pricing varies by extractive sector – cooperative strategies preserve value of oil, while destroying value of gas and coal rents. We will break down these and other political economy findings below.<sup>8</sup> For gas and coal owners, cooperative carbon prices reduce the present value of rents more than any unilateral scenario. When LCT pioneers introduce very high unilateral carbon prices in noncooperative scenarios, they squeeze the margins of their heavy industry, leading to accelerated mines’ and plants’ closures followed by the leakage of output and emissions to FFDCs, which do not internalize carbon cost for domestic industries.

Coal reserves in FFDCs are the most affected by the low carbon transition in percentage terms (figure 14), but the least in value terms (figure 15). The worst-case scenario for coal rents in in FFDCs consists of cooperative domestic carbon taxes and asset diversification. It reduces the coal rents by more than 43 percent, or by US$1.2 trillion, compared with BAU between 2021 and 2050. Even in the best-case scenario for FFDCs’ coal rents – non-cooperation without border carbon adjustment and traditional diversification – they lose about 17 percent of value, or US$0.5 trillion over the period. The decline in coal asset value has only a negligible macroeconomic effect on most coal-mining nations, because coal rents are very small compared with oil and gas rents. However, mining regions in countries like Colombia, Indonesia, Mongolia, Mozambique, and South Africa could experience economic decline and social distress.

Gas rents are moderately affected by an LCT, both in value and percentage terms, compared with coal and oil, and even increase above BAU in unilateral scenarios without border taxes and traditional diversification. The domestic industrial use of gas in this best-case scenario increases much faster and discounted rents are even 3 percent ($300 billion) higher than in BAU. The worstcase scenario for gas is the same as for coal producers – cooperative climate action with asset diversification. It results in lowering the present value of rents by $2.8 trillion compared with BAU in the period 2021–50. This is 25 percent less than in BAU. Gas is not making major headway in power generation. It is not competitive with coal before an LCT impact, and with renewables afterwards. Faster growth of industrial use of gas partly offsets sluggish demand in the power sector, and the use of gas in transport never scales up in our simulations, being 8 The absolute values of resource rents critically depend on the future international resource prices, which here are computed endogenously by the linked Rystad and Envisage models. Assumptions of extraction costs and available reserves in Rystad linked to demand trajectories computed by ENVISAGE give smoothly increasing fuel prices. Also, the short-term fluctuations in fuel prices such as in 2014 and 2020 are not captured by the simulations. Therefore, the reader is advised to draw policy conclusions from the difference between the scenario results and their relative scales, rather than from absolute dollar values of resource rents and other asset values.

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