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OPEC Strategies and Oil Rent in a Climate Conscious World

Daniel J.A. Johansson, Christian Azar, Kristian Lindgren and Tobias A. Persson 

Year: 2009
Volume: Volume 30
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No3-2
View Abstract

In the UNFCCC process, energy exporting countries (primarily OPEC) claim compensation for losses in expected oil rent due to CO2 mitigation measures. However, there are mechanisms that may raise rather than lower the oil rent. If a carbon price is implemented universally, the cost of using oil substitutes such as unconventional oil or synthetic diesel from coal or natural gas will increase even more than the cost of using conventional oil. Here, a dynamic model that takes into account OPEC�s dominant position in the world�s liquid fuel market is developed in order to analyze these mechanisms. In this model, OPEC is assumed to act as strategic leader while all other liquid fuel producers act as price-takers. We find that the net present value of OPEC�s conventional oil rent increases by about 5% due to the carbon prices needed to reach stringent CO2 emission targets. For less ambitious targets, the increase in oil rent could be even higher. An extensive sensitivity analysis is also performed, which corroborates the main result.

Politics and Economics of Second-Best Regulation of Greenhouse Gases: The Importance of Regulatory Credibility

Valentina Bosetti and David G. Victor

Year: 2011
Volume: Volume 32
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-1
View Abstract

Compared with economically ideal policies, actual limits on global warming gases are likely to be "second-best" in many ways. Most studies focus on "second-best" approaches such as delaying emission controls in developing countries, constraining international emission trading, or regulating gases piecemeal by sector rather than equally across the whole economy. We show that another second-best approach--lacking of regulatory credibility--imposes up to six times the extra costs on the economy when compared with all other "secondbest" factors combined. When regulatory rules are not believable then firms and other agents become short-sighted and unable to make optimal investments in research and development as well as long-lived technologies. Although analysts have largely ignored this issue, low credibility is commonplace when governments tackle international problems because international institutions such as treaties are usually weak and fickle. Governments can help solve credibility problems with strategies such as "pre-committing" regulations into domestic law that is usually more credible than international commitments. We show that China, for example, can justify unilateral, emission controls because such pre-commitment would encourage Chinese firms to invest with a clearer eye to the future.

Climate Policy and Strategic Operations in a Hydro-Thermal Power System

Farzad Hassanzadeh Moghimi, Hanna Ek Fälth, Lina Reichenberg, and Afzal S. Siddiqui

Year: 2023
Volume: Volume 44
Number: Number 5
DOI: 10.5547/01956574.44.4.fmog
View Abstract

Decarbonisation of the Nordic power sector entails substantial variable renewable energy (VRE) adoption. While Nordic hydropower reservoirs can mitigate VRE output's intermittency, strategic hydro producers may leverage increased flexibility requirements to exert market power. Using a Nash-Cournot model, we find that even the current Nordic power system could yield modest gains from strategic reservoir operations regardless of a prohibition on "spilling" water to increase prices. Instead, strategic hydro producers could shift generation from peak to off-peak seasons. Such temporal arbitrage becomes more attractive under a climate package with a €100/t CO2 price and doubled VRE capacity. Since the package increases generation variability, lowers average prices, and makes fossil-fuelled plants unprofitable, strategic hydro producers face lower opportunity costs in shifting output from peak to off-peak seasons and encounter muted responses from price-taking fossil-fuelled plants. Hence, a climate package that curtails CO2 emissions may also bolster strategic hydro producers' leverage.

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