The Effect of CO2 Pricing on Conventional and Non-Conventional Oil Supply and Demand
AbstractWhat would be the effect of CO2 pricing on global oil supply and demand? This paper introduces a model describing the interaction between conventional and non-conventional oil supply in a Hotelling framework and under CO2 constraints. The model assumes that nonconventional crude oil enters the market when conventional oil supply alone is unable to meet demand, and the social cost of CO2 is included in the calculation of the oil rent at that time. The results reveal the effect of a CO2 tax set at the social cost of CO2 on oil price and demand and the uncertainty associated with the time when conventional oil production might become unable to meet demand. The results show that a tax on CO2 emissions associated with fuel use would reduce oil demand despite the effect of lower future rents, and would delay the time when conventional oil supply is unable to satisfy demand. More precisely, between 81 and 99% of the CO2 tax is carried into the oil price despite the counter-balancing effect of the reduced rent. A CO2 tax on fuel use set at the social cost of CO2 would delay by 25 years the time when conventional oil production is unable to meet oil demand, from 2019 to 2044 (mean value). The results show that this date is very sensitive to the price elasticity of demand and the demand growth rate, which shows the great potential of demand-side measures to smooth the transition towards low-carbon liquid fuel alternatives.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1054.
Date of creation: 01 Oct 2010
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Web page: http://www.econ.cam.ac.uk/index.htm
Oil supply and demand; Conventional and non-conventional oil; CO2 pricing; Social cost of CO2.;
Find related papers by JEL classification:
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-16 (All new papers)
- NEP-ENE-2010-10-16 (Energy Economics)
- NEP-ENV-2010-10-16 (Environmental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Méjean, Aurélie & Hope, Chris, 2008.
"Modelling the costs of non-conventional oil: A case study of Canadian bitumen,"
Elsevier, vol. 36(11), pages 4205-4216, November.
- Méjean, A. & Hope, C., 2008. "Modelling the costs of non-conventional oil: A case study of Canadian bitumen," Cambridge Working Papers in Economics 0810, Faculty of Economics, University of Cambridge.
- Jonathan Kohler, Michael Grubb, David Popp and Ottmar Edenhofer , 2006. "The Transition to Endogenous Technical Change in Climate-Economy Models: A Technical Overview to the Innovation Modeling Comparison Project," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 17-56.
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