Two Wrongs Can Sometimes Make a Right: The Environmental Benefits of Market Power in Oil

Abstract

Market power reduces equilibrium quantities and distorts production, typically causing welfare losses. However, as Buchanan (1969) noted, market power may mitigate overproduction from negative externalities. This paper examines this in the global oil market, where OPEC’s market power affects oil production and carbon intensity. We estimate that from 1970 to 2021, OPEC’s market power reduced emissions by over 67 GtCO2, equating to $4,073 billion in climate damages and 17.8% of the carbon budget needed for the 1.5◦ C Paris Agreement target. This environmental benefit outweighs the welfare loss from distorted production allocation.

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