Profitability of Different Instruments in International Climate Policies

Statistics Norway Discussion Paper No. 403

36 Pages Posted: 30 Mar 2005

See all articles by Finn Roar Aune

Finn Roar Aune

Statistics Norway - Research Department

Snorre Kverndokk

Ragnar Frisch Centre for Economic Research

Lars Lindholt

Statistics Norway - Research Department

Knut Einar Rosendahl

Norwegian University of Life Sciences; Statistics Norway - Research Department

Date Written: January 2005

Abstract

This article discusses how different climate policy instruments such as CO2 taxes and renewable energy subsidies affect the profitability of fossil fuel production, given that a fixed global climate target shall be achieved in the long term. Within an intertemporal framework, the model analyses show that CO2 taxes reduce the short-term profitability to a greater extent than technology subsidies, since the competition from CO2-free energy sources does not become particularly noticeable until decades later. Due to e.g. discounting of future revenues, most fossil fuel producers therefore prefer subsidies to their competitors above CO2 taxes. However, this conclusion does not apply to all producers. Oil producers outside OPEC lose the most on the subsidising of CO2-free energy, while CO2 taxes only slightly reduce their profits. This is connected to OPEC's role in the oil market, as the cartel chooses to reduce its extraction significantly in the tax scenario. The results seem to be consistent with observed behaviour of important players in the climate negotiations.

Keywords: Climate Policy, Energy markets, Technological change

JEL Classification: Q25, Q32, Q42, O30

Suggested Citation

Aune, Finn Roar and Kverndokk, Snorre and Lindholt, Lars and Rosendahl, Knut Einar, Profitability of Different Instruments in International Climate Policies (January 2005). Statistics Norway Discussion Paper No. 403. Available at SSRN: https://ssrn.com/abstract=679022 or http://dx.doi.org/10.2139/ssrn.679022

Finn Roar Aune (Contact Author)

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway

Snorre Kverndokk

Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0349 Oslo
Norway
+47 22958811 (Phone)
+47 22958825 (Fax)

HOME PAGE: http://www.frisch.uio.no/cv/snorrek_eng.html

Lars Lindholt

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway

Knut Einar Rosendahl

Norwegian University of Life Sciences ( email )

PO Box 5033
NO-1432 Aas
Norway
+47 64966117 (Phone)

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway
+47 21094954 (Phone)
+47 21094963 (Fax)

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