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Unilateral Climate Policy: Can OPEC Resolve the Leakage Problem?

In the absence of a global agreement to reduce greenhouse gas emissions, individual countries have introduced national climate policies. Unilateral action involves the risk of relocating emissions to regions without climate regulations, i.e., emission leakage. A major channel for leakage are price changes in the international oil market. Previous studies on leakage have assumed competitive behavior in this market. Here, we consider alternative assumptions about OPEC's behavior in order to assess how these affect leakage and costs of unilateral climate policies. Our results based on simulations with a large-scale computable general equilibrium model of the global economy suggest that assumptions on OPEC's behavior are crucial to the impact assessment of unilateral climate policy measures. We find that leakage through the oil market may become negative when OPEC is perceived as a dominant producer, thereby reducing overall leakage drastically compared to a setting where the oil market is perceived competitive.

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Energy Specializations: Petroleum – Other; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation; Energy Modeling; Petroleum

JEL Codes:
Q49 - Energy: Other
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
C54 - Quantitative Policy Modeling
Q3 -

Keywords: Carbon Leakage, Oil Market, OPEC Behavior

DOI: 10.5547/01956574.35.4.4

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Published in Volume 35, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.