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When OPEC Leads and the Fringe Follows: A Climate Story

Author

Listed:
  • Hassan Benchekroun

    (McGill University)

  • Simon Elgersma

    (Rijksuniversiteit Groningen)

  • Gerard van der Meijden

    (Vrije Universiteit Amsterdam)

  • Cees Withagen

    (Vrije Universiteit Amsterdam)

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.

Suggested Citation

  • Hassan Benchekroun & Simon Elgersma & Gerard van der Meijden & Cees Withagen, 2026. "When OPEC Leads and the Fringe Follows: A Climate Story," Tinbergen Institute Discussion Papers 26-030/VIII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20260030
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    References listed on IDEAS

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    1. John Asker & Allan Collard-Wexler & Charlotte De Canniere & Jan De Loecker & Christopher R. Knittel, 2024. "Two Wrongs Can Sometimes Make a Right: The Environmental Benefits of Market Power in Oil," NBER Working Papers 33115, National Bureau of Economic Research, Inc.
    2. Salant, Stephen W, 1976. "Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1079-1093, October.
    3. Benchekroun, Hassan & van der Meijden, Gerard & Withagen, Cees, 2019. "An oligopoly-fringe non-renewable resource game in the presence of a renewable substitute," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 1-20.
    4. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, June.
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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