OPEC, Unconventional Oil and Climate Change - On the importance of the order of extraction

Hassan Benchekroun, Gerard van der Meijden and Cees Withagen
Additional contact information
Gerard van der Meijden: Vrije Universiteit Amsterdam

No 20-001/VIII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We show that OPEC’s market power contributes to climate change by enabling producers of relatively expensive and dirty oil to start producing before OPEC reserves are depleted. We examine the importance of this extraction sequence effect by calibrating and simulating a cartel-fringe model of the global oil market. While welfare net of climate damage under the cartel-fringe equilibrium can be significantly lower than under a first-best outcome, almost the entire welfare loss is due to the sequence effect of OPEC’s market power. In our benchmark calibration, the cost of the sequence effect amounts to 15 trillion US$, which corresponds to 97 percent of the welfare loss. Moreover, we find that an increase in non-OPEC oil reserves decreases global welfare. In a counterfactual world without non-OPEC oil, global welfare would be 13 trillion US$ higher, 10 trillion US$ of which is due to lower climate damages.

Keywords: cartel-fringe; climate policy; non-renewable resource; Her?ndahl rule (search for similar items in EconPapers)
JEL-codes: Q31 Q42 Q54 Q58 (search for similar items in EconPapers)
Date: 2020-01-06
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://papers.tinbergen.nl/20001.pdf (application/pdf)

Related works:
Journal Article: OPEC, unconventional oil and climate change - On the importance of the order of extraction (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20200001

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().