Phasing out oil
consumption subsidies:
oil market effects
Finn Roar Aune, Kristine Grimsrud,
Lars Lindholt, Knut Einar Rosendahl,
Halvor Briseid Storrøsten
Fossil subsidies
• In 2013, $548 billion
• 10 countries responsible for 75% of
subsidies
• Increases
consumption
“Subsidiesenergy
keep fossil
fuels
• Reduces
invest in
artificiallyincentives
cheap andtowithout
a energy
efficiency
andofalternative
energy sources
phasing out
fossil fuel subsidies,
• Inefficient
of coststargets”
and revenues
we will notdistribution
reach our climate
in
space
andIEA
time
Fatih
Birol,
• Negative effect on government finances
• 80% of fossil fuel subsidies go to middle
and high income households
Source: IEA, 2014
The biggest subsidizers
Phasing out oil consumption
subsidies
• Schwanitz et al 2014, Burniax and
Chateau 2014 (perfect markets)
• Consumption subsidy/tax: price-gap
• Oil consumption subsidies to transportation
• Phase out by 2020
• Or, increase to US tax levels by 2020 in
subsidizing countries
Petro2 model
• Petro2 characteristics
– Long term effects of technological and policy change
in the global oil market
•
•
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Partial equilibrium model
Oil is modeled as a non-renewable resource
Dynamic, intertemporal trade-offs
Perfect foresight
OPEC-core countries has market power, while
non-OPEC regions compete freely (OPEC-core
= Saudi Arabia, Qatar, Kuwait, UAE)
7 Regions
7 Sectors
6 Energy goods
• OPEC
• Industry
• Oil
• Western
• Households
• Gas
• USA
• International shipping
• Electricity
• Rest-OECD
• Power generation
• Coal
• Russia
• Road and rail transport
• Biomass
• China
• Domestic/International
• Biofuels for
Europe
aviation and domestic
• Rest of the
shipping
World
• Other sectors
transport
Oil demand in region and sector
• Consumer price, GDP, energy efficiency,
population
– Consumer price = producer price +
transportation and distribution cost +/tax/subsidy
– Constant elasticity of substitution that permits
incomplete substitution between energy goods
– Short- and long term elasticities for price,
income and population growth
– A lag parameter determines the relationship
between short- and long term elasticities
Regional oil supply
• Determined by marginal
extraction cost
– Increasing in accumulated
production (regional rate of
increase estimated based on
EIA data and recalibrated
based on IEA scenario for
som of the regions.
– Decreasing in techological
progress
• Lag parameters determine
the relationship between
short- and long term
elasticities of supply
(Source: aftenposten.no)
Model optimization
• OPEC/OPEC-core maximizes present
value of future profits constrained by
– remaining resources
– residual demand for fixed non-OPEC
production
• All non-OPEC regions compete freely
Data
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Base year is 2007
International Monetary Fund: GDP
United Nations: population projections
Expeced mix of energy goods, IEA up to
2040, IPCC from 2050
Prices of other energy goods: IEA
Subsidies and taxes by region/sector:
several sources, Deutsche Gesellschaft für
Technische Zusammenarbeit GTZ/GIZ.de
for oil in transportation
Production costs from IHS, IEA
Marginal cost increase in accumulated
production estimated based on IEA data
Technological growth assumed to 2%
Model output
• Global oil price
• Regional and sectoral oil
consumption and price
• Oil production by region
• The reference scenario is calibrated to
IEA’s New Policies Scenario up to 2050
and IPCCs reference scenario after 2050
Model scenarios
• Consumption subsidies to oil to
transportation all regions (row, opec)
• and oil to power generation (opec only)
• 1. Phaseout subsidies by 2020
• 2. From subsidies to US tax level in 2020
Effect on price and production
Effect on regional oil consumption
Effect on sectoral oil consumption
Conclusions
• Carbon leakage
• Green paradox
• Oil is off the market so a positive climate
effect but carbon leakage and green
paradox reduces the effect
• Future work:
– Remove all price gap consumption subsidies
– Taxes
– Estimate welfare effects