Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/220038
Authors: 
Benchekroun, Hassan
van der Meijden, Gerard
Withagen, Cees
Year of Publication: 
2020
Series/Report no.: 
Tinbergen Institute Discussion Paper TI 2020-001/VIII
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.
Subjects: 
cartel-fringe
climate policy
non-renewable resource
Her?ndahl rule
JEL: 
Q31
Q42
Q54
Q58
Document Type: 
Working Paper

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