When OPEC Leads and the Fringe Follows: A Climate Story

Hassan Benchekroun, Simon Elgersma, Gerard van der Meijden and Cees Withagen
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Hassan Benchekroun: McGill University
Simon Elgersma: Rijksuniversiteit Groningen
Gerard van der Meijden: Vrije Universiteit Amsterdam
Cees Withagen: Vrije Universiteit Amsterdam

No 26-030/VIII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We study how market power, leadership, and commitment affect oil extraction and climate outcomes in a cartel-fringe model with renewables and a backstop technology. Comparing competitive, Nash-Cournot, open-loop, and feedback von Stackelberg equilibria, we show that market power and leadership can either increase or reduce climate damages, depending on commitment, cost and emission factor heterogeneity, and relative resource stocks. In a benchmark with a social cost of carbon of 250 USD/tC, market power without leadership lowers climate damages by 3.9 trillion USD relative to perfect competition. With leadership, these gains fall to 3.1 trillion USD when the leader can commit and to 2.6 trillion USD without commitment. Small changes in resource stocks, cost parameters, or climate policy can trigger regime shifts with discontinuous welfare and climate effects. Carbon taxes and backstop subsidies can remove sequencing distortions but may weaken the conservation effect of market power. When the cartel cannot commit, the second-best carbon tax lies well below the Pigouvian level yet often delivers near-first-best welfare. Finally, we show that market power and leadership may reduce cartel profits.

Keywords: cartel-fringe; climate policy; renewables; dynamic game; von Stackelberg equilibrium (search for similar items in EconPapers)
JEL-codes: C72 Q30 Q38 Q42 (search for similar items in EconPapers)
Date: 2026-06-11
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