Unilateral Emission Pricing and OPEC's Behaviour

Abstract

Unilateral climate policies involve the risk of carbon leakage, driven by price changes in the oil market and other international markets. We have shown in previous analysis that OPEC may have an incentive to increase the oil price as a response to EU climate policy, thereby retaining resource rents and turning leakage through the oil market negative. In this paper, we examine the implications of OPEC's strategic responses more thoroughly by extending our former analysis along four key dimensions: (i) the size of the climate coalition, (ii) the size of the oil cartel, (iii) oil–gas price linkages in the EU and Japan, and (iv) subsidies for oil consumption within OPEC. We show that the coalition or cartel size critically affects the scope for rent seeking and leakage reduction, whereas oil–gas price linkages in the EU and Japan or subsidies within OPEC do not alter the findings of our previous analysis.