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G-2008-71

OPEC Oil Pricing Strategies in a Climate Regime: A Two-Level Optimization Approach in an Integrated Assessment Model

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This paper presents an analysis of the optimal oil production quotas of OPEC under a worldwide climate regime imposing a limitation on the radiative forcing. The analysis is conducted using a multi-region detailed energy-economy-environment bottom-up model (TIAM) where the demand laws for oil and its substitutes are implicitly defined as the result of a global supply-demand equilibrium in the World energy system, including the trading of energy forms and emission permits. In this respect the analysis differs fundamentally from previous representations of OPEC options in a climate regime, since it takes explicitly into account the technology switches that will be triggered by a proactive climate policy at the World level. The analysis shows that OPEC's quota strategies have a strong impact on oil prices with (climate scenario) and without (reference scenario) a world climate regime, but OPEC's market power, measured as the impact on global welfare, remains moderate, and consequences of OPEC's quotas on emissions and climate are very limited. In the climate scenario, OPEC would derive no advantage in flooding the oil market: the severe climate target is more important in determining oil demand than OPEC's production strategies. However, OPEC's quotas slightly reinforce (positively) the energy and technology decisions taken to mitigate the greenhouse gas emissions. Finally, OPEC's profits being lower in the climate scenario compared to the reference scenario, OPEC may be reluctant to engage in a strict global emission reduction agreement (considering a decision based on oil profits alone).

, 30 pages

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