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 energy consumption• Reduces incentives to invest in energy

efficiency and alternative energy sources• Inefficient distribution of costs and revenues

in space and time • Negative effect on government finances• 80% of fossil fuel subsidies go to middle and

high income households

“Subsidies keep fossil fuels artificially cheap and without a phasing out of fossil fuel subsidies, we will not reach our climate targets” Fatih Birol, IEA

The

big

gest

sub

sidi

zers

Source: IEA, 2014

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

• 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

Europe

• Households • Gas

• USA • International shipping • Electricity

• Rest-OECD • Power generation • Coal

• Russia • Road and rail transport • Biomass

• China

• Rest of the

World

• Domestic/International

aviation and domestic

shipping

• Biofuels for

transport

  • Other sectors  

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• 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