Profitability of different instruments in international climate policies
AbstractThis 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 OPEC’s 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.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 403.
Date of creation: Jan 2005
Date of revision:
Climate policy; Energy markets; Technological change;
Find related papers by JEL classification:
- Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- O30 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - General
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
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