Lars Lindholt

Profitability of Different Instruments in International Climate Policies

This article discusses how different climate policy instruments such as CO2 taxes and renewable energy subsidies affect the profitability of fossil fuel production, given that a fixed global climate target shall be achieved in the long term. Within an intertemporal framework, the model analyses show that CO2 taxes reduce the short-term profitability to a greater extent than technology subsidies, since the competition from CO2-free energy sources does not become particularly noticeable until decades later. Due to e.g. discounting of future revenues, most fossil fuel producers therefore prefer subsidies to their competitors above CO2 taxes. However, this conclusion does not apply to all producers. Oil producers outside OPEC lose the most on the subsidising of CO2-free energy, while CO2 taxes only slightly reduce their profits. This is connected to OPECs role in the oil market, as the cartel chooses to reduce its extraction significantly in the tax scenario. The results seem to be consistent with observed behaviour of important players in the climate negotiations.

The market power of OPEC 1973-2001

We apply a multi-equation dynamic econometric model on monthly data to test if the behaviour of OPEC as a whole or different sub-groups of the cartel is consistent with the characteristics of dominant producers on the world crude oil market in the period 1973–2001. Our results indicate that the producers outside OPEC can be described as competitive producers, taking the oil price as given and maximizing profits. The OPEC members do not fit the behaviour of price-taking producers. Our findings of low residual demand price elasticities for OPEC underpin the potential market power of the producer group, and are in line with the results in some recent energy studies. On the other hand, our findings indicate that neither OPEC nor different sub-groups of the cartel can be characterized as a dominant producer in the period 1973–1994. However, we find that the characteristics of a dominant producer to some extent fit OPEC-Core as from 1994. Thus, although OPEC clearly has affected the market price, the producer group has not behaved as a pure profit-maximizing dominant producer.

Stabilization of CO 2 concentrations: mitigation scenarios using the Petro model

How to stabilize the CO2 concentration in the atmosphere depends crucially on baseline assumptions of future economic growth, energy demand and supply technologies, etc. In this paper we investigate how different assumptions about the future affect the necessary global policy measures to reach specific concentration targets for CO2. This is done by constructing two contrasting baseline scenarios within an intertemporal model of fossil fuel markets. We find that the appropriate CO2 emission and concentration paths for a given concentration target are very dependent on the baseline. Moreover, the impact on oil wealth for OPEC and other oil producers of stabilizing CO2 concentrations depends significantly both on the baseline and on whether the target is reached through carbon taxes or autonomous technological change in carbon-free energy sources. Carbon leakage through changes in international fossil fuel prices is found to be negligible and possibly negative.

Profitability of fossil-fuel production under different instruments in international climate policies

This article discusses how different climate policy instruments such as CO2 taxes and renewable energy subsidies affect the profitability of fossil-fuel production, given that a fixed global climate target shall be achieved in the long term. Within an intertemporal framework, the model analyses show that CO2 taxes reduce the short-term profitability to a greater extent than technology subsidies, since the competition from CO2-free energy sources does not become particularly noticeable until decades later. Due to, for example, the discounting of future revenues, most fossil-fuel producers prefer subsidies to their competitors rather than CO2 taxes. However, this conclusion does not apply to all producers. Oil producers outside OPEC lose the most on the subsidizing of CO2-free energy, while CO2 taxes only slightly reduce their profits. This is connected to OPECs role in the oil market, as the cartel chooses to reduce its extraction significantly in the tax scenario. The results seem to be consistent with the observed behaviour of important players in the climate negotiations.

Beyond Kyoto: backstop technologies and endogenous prices on CO2 permits and fossil fuels

This paper analyses the markets for fossil fuels given that the limits the Kyoto Protocol sets on CO2 emissions from Annex B countries extend beyond 2008–2012. A forward-looking model with endogenous prices for fossil fuels is applied under different assumptions concerning the technological progress for a carbon-free backstop technology. Both the time-profile of the international permit price needed for the Kyoto Forever targets as well as the implications through reduced demand and lower producer prices for fossil fuels are calculated. The permit price has to rise at least up to 2030 in order to fulfil the emission targets. From then on the necessary permit price shows different future developments, dependent on when the backstop technology starts to replace oil. Since changes in the availability of the backstop technology shift the time-profile of the permit price, the loss of petroleum wealth for oil and gas producers varies between the scenarios, but is never more than 20%. Findings indicate that the reduction in gas revenues in OECD-Europe after the introduction of the targets amounts to a yearly loss of 0.01–0.02% of their total GNP for half a century. The reduction in oil revenues for OPEC is comparable to an annual loss of 2.9–5.4% of their GNP over a period of sixty years.