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The climate policy of an oil producing country
–
demand-side versus supply-side policies
By
Taran Fæhn, Cathrine Hagem, Lars Lindholt, Ståle Mæland and Knut
Einar Rosendahl,
Statistics Norway
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Main Research Question
• Given a target for domestic contribution to global emissions
reductions – what is the optimal combination of reduced
fossil fuel consumption and reduced fossil fuel production?.
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Motivation
Ongoing political debate in Norway – prior to the elections
–
–
–
–
The role of petroleum extraction in the Norwegian climate policies
Parliament’s ambitious, expensive agreement on domestic demand-side
Why only demand-side? Oil interests against environmental interests
Debate fuelled substantially by our recent reports and media activity!
Literature:
– Demand side carbon leakage of unilateral climate policies
 Increased demand abroad
 Bohm, 1993, Markusen et al. (1993; 1995), Rauscher (1997) and Böhringer et al.
(2010)
– Supply-side carbon leakages


–
Increased supply abroad
Harstad (2012) shows that the best policy is simply to buy marginal foreign
fossil fuel deposits and conserve them (inelastic supply on the margin)
Optimal combinations of supply side versus demand side


Hoel (1994), Golombek et al. (1995)
Demand side versus supply side – Norway, Hagem (1994).
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Our contributions
• Update previous numerical estimates
• Emission intensities in extraction can vary among countries
• Imperfect competition
• Empirical cost assessments of marginal cuts in Norwegian
oil production
• A survey of the fossil fuel market elasticity estimates from
the literature
Model: Domestic objective function
•
Maximise welfare (W), subject to the global climate policy
target A :
Max W  B(y o , y c , y g ) 
yi ,x i

i  o,c,g
ci (x i ) 

i  o,c,g
Pi ()  (y i  x i )
s.t.
E  E 0  A,
•
First order cond.:
Byi  Pi
Eyi

Pi  ci (x i )

Exi
Model: The energy market
•
•
Three fossil fuel markets (oil, coal and gas)
Static model
– less suitable for existing extraction fields (Hotelling, green paradox)
– suitable for new developments, including enhanced oil recovery (EOR) investments
•
Global emissions, E, including extraction emissions:
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3

E  T   i (x i )   i (X i ).
i 1
•
i o,c,g
i 1
xi 

i o,c,g
Xi  T 

i o,c,g
yi 

i o,c,g
Yi
Fossil fuel market equilibria:
– Oil market: net Home import = fringe supply abroad + OPEC (dominant producer) demand abroad
( yO  xO )  SO ( PO )  Z ( PO )  DO ( PO , PG , PC )
– Gas and coal markets:
( y  x )  S ( P )  D ( P , P , P ) , i = c, g
i
i
i
i
i
O
G
C
Leakage rates
L 
D
O
 Y
j o ,c , g
 y
j

 DP
k
k  o , g ,c
O
O
Reduced oil demand at home reduces oil price and, thus,
affects demand abroad for o (>0) and c, g (<0)
L 
S
O
X
j  o ,c , g
 x
O
j

 Y  x
j  o ,c , g
j
O
 x
 1 L
D
O
O
Reduced oil production increases oil price and, thus, affects
supply abroad of oil (>0) and of c,g (<0)
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Global emissions effects
3
3
i 1
i 1
E  T   i (x i )   i (X i ).
T = (i) gross (direct) effects + (ii) leakages through oil market + (iii) leakages
through gas and coal markets
  (iv) effects on domestic extraction emissions
  (v) effects on foreign extraction emissions
Table 1. 1 unit reduced oil extraction/consumption – net global emission reductions. Benchmark assumptions.
OPEC: Dominant producer
OPEC: Competitive producer
Supply side
Supply side
Demand side
Demand side
(i) Gross emission red
1
1
1
1
(ii) Oil market leakage
-0.546
-0.454
-0.507
-0.493
(iii) Coal/gas market
-0.088
0.088
-0.096
0.096
0.028
0
0.028
0
(v) Foreign extraction
-0.041
0.041
-0.043
0.043
DE : Net emission red.
0.353
0.676
0.383
0.646
leakage
(iv)Domestic extraction
Benchmark:
elDopo=-0.5, elDgpo = elDcpo =0.1, elSopo =0.5, ´= 90/1000, ´= 300, ´opec =76
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Marginal cost of forgone oil consumption for Norway
•Climate Cure 2020: tasked to estimate costs of unilateral 2020 ambitions of the Parliament;
•scenario with new demand side policies only in NETS (assumption: global contribution ambitions)
Marginal cost of forgone profits from Norwegian oil extraction
•Data: Costs of cutting present production in several small, relatively costly fields in decline-phase
•We assess: fairly representative for 2020
USD/t CO2
120
100
80
60
40
20
0
0
2
4
-20
million tonnes CO2
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Leakage-adjusted domestic demand-side marginal abatement cost curve
and the marginal supply-side abatement cost curve
USD/t CO2
900
800
700
marginal demand-side
abatement
600
500
marginal supply-side
abatement
400
Poly. (marginal demand-side
abatement)
300
200
Poly. (marginal supply-side
abatement)
100
0
0
1
2
3
4
million tonnes CO2
5
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• Combine the two and calculate their effects on global emissions when
leakages are accounted for
• The domestic contribution target to global cuts is nearly 6 millt CO2
• Demandside from left; supplyside from right.
• Top of demand side: Only demandside (Klimakur)
• Top of supply side: Only supply side (cheaper as in Hagem 1994)
• Intercept: the cost effective combination:
Around two thirds of the measures to reduce global emissions should be
supply side measures
Policy impacts: tax consumption and
production:
• Demand side policies: Carbon tax rate: 248 USD/t CO2
– Only oil demand cuts
– 40% of the Climate Cure costs
• Supply side policies: Oil production tax: 53 USD/barrel(!)
– App. half of the oil price
– 3.4 percent of present domestic oil extraction
– 50% tax could potentially lead to much larger cuts (if supply side is
cheaper than estimated)
– Alternatives:
 Only tax undeveloped fields
 More restrictive concession&exploration policies
 Less aggressive recovery ambitions in present fields
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Table 2. Sensitivity analysis. Effects of reducing Norwegian extraction or consumption of oil by
one unit of carbon.
Net emission
Target Supply- vs.
reduction*
( A)
demand side
E xi
Mt of
Supply
E yi
Optimal taxes
Demand
CO2
Prod. tax
CO2 tax
$/barrel
$/ton
Benchmark case
0.353
0.676
5.7
66%
34%
53
243
Competitive OPEC
0.383
0.646
5.5
71%
28%
53
211
Fixed OPEC supply
0.49
0.539
4.6
87%
13%
45
119
Fixed oil price
0.005
1.025
8.7
0%
100%
-
576
Supply two times more
0.204
0.825
7.0
36%
64%
45
436
0.528
0.5
4.2
90%
10%
42
94
0.353
0.676
5.7
84%
16%
29
131
elastic than demand
Demand two times more
elastic than supply
50% lower supply side
costs
*
Net global emission reduction from reduced Norwegian oil extraction (supply side) or consumption (demand
side) by one unit of carbon.
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Conclusions
• Global emissions will most probably decrease when
Norway cuts oil extraction
• Though many sources of uncertainty, robust
conclusion:
• The lion heart of the cuts should be implemented
through supply side policies
• 2/3 in benchmark
• Rely on
• Home country wishes to make unilateral actions
• Offsets are not feasible or preferred alternatives
• The objective is to cut global emissions
• Compared to the costs of demand policies only,
costs are cut by 60%
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Thank you for your attention
Discussion paper:
Fæhn, T, C. Hagem, L. Lindholt, S. Mæland, and K.-E. Rosendahl
(2013):Climate policies in a fossil fuel producing country Demand versus
supply side policies, Discussion papers 747, Statistics Norway
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