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The Effects of Transport Regulation on the Oil Market: Does Market Power Matter?

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Abstract

Popular instruments to regulate consumption of oil in the transport sector include fuel taxes, biofuel requirements, and fuel efficiency. Their impacts on oil consumption and price vary. One important factor is the market setting. We show that if market power is present in the oil market, the directions of change in consumption and price may contrast those in a competitive market. As a result, the market setting impacts not only the effectiveness of the policy instruments to reduce oil consumption, but also terms of trade and carbon leakage. In particular, we show that under monopoly, reduced oil consumption due to increased fuel efficiency will unambiguously increase the price of oil.

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... Two characteristics of the oil market may be of particular importance when we study the feedback mechanisms and distributional effects of fuel efficiency, namely market power and the intertemporal setting. Kverndokk and Rosendahl (2013) show that the effects of policy instruments to reduce oil demand in the transport sector may be very dependent on the market structure in the oil market. They compare the effects on the oil price of different policy instruments such as a fuel tax, biofuel requirements and fuel efficiency standards. ...
... Dynamics are important for the "green paradox" effect, which depends on the optimal production profile over time. As opposed to Kverndokk and Rosendahl (2013), we introduce a numerical intertemporal model with market power to discuss this effect. Thus, our contribution is to study the implications on both the supply and demand for oil, when we take into account both market power and the intertemporal aspect of exhaustible resources. ...
... Following eq. (3) in Kverndokk and Rosendahl (2013), the inverse demand function for fuel P f (Q f ) can be expressed as P f Q f = 1 AE E I P s Q f AE E I , where P s denotes the underlying inverse demand function for energy services. 21 From this expression we can derive the expression in (5). ...
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We study the interactions between fuel efficiency improvements in the transport sector and the oil market, where the efficiency improvements are policy-induced in certain regions of the world. We are especially interested in feedback mechanisms of fuel efficiency such as the rebound effect, carbon leakage and the “green paradox”, but also the distributional effects for oil producers. An intertemporal numerical model of the international oil market is introduced, where OPEC-Core producers have market power. We find that the rebound effect has a noticeable effect on the transport sector, with the magnitude depending on the oil demand elasticity. In the benchmark simulations, we calculate that almost half of the energy savings may be lost to a direct rebound effect and an additional 10% to oil price adjustments. In addition, there is substantial intersectoral leakage to other sectors through lower oil prices in the regions that introduce the policy. There is a small green paradox effect in the sense that oil consumption increases initially when the fuel efficiency measures are gradually implemented. Finally, international carbon leakage will be significant if policies are not implemented in all regions; we estimate leakage rates of 35% or higher when only major consuming regions implement fuel economy policies. Non-OPEC producers will to a larger degree than OPEC producers cut back on its oil supply as a response to fuel efficiency policies due to high production costs.
... Two characteristics of the oil market may be of particular importance when we study the feedback mechanisms and distributional effects of fuel efficiency, namely market power and the intertemporal setting. Kverndokk and Rosendahl (2013) show that the effects of policy instruments to reduce oil demand in the transport sector may be very dependent on the market structure in the oil market. They compare the effects on the oil price of different policy instruments such as a fuel tax, biofuel requirements and fuel efficiency standards. ...
... Dynamics are important for the "green paradox" effect, which depends on the optimal production profile over time. As opposed to Kverndokk and Rosendahl (2013), we introduce a numerical intertemporal model with market power to discuss this effect. Thus, our contribution is to study the implications on both the supply and demand for oil, when we take into account both market power and the intertemporal aspect of exhaustible resources. ...
... 16 While the oil price is increasing over time in all scenarios, the price at a given time period will be lower. Note that this is different than the conclusion in Kverndokk and Rosendahl (2013), as referred in the introduction above, where the price would increase if the market power of oil producers were sufficiently strong. The reasons for the different results are that Kverndokk and Rosendahl used a static model, where the producers did not take into account the intertemporal aspects, and that the market power is not very strong in our model as only OPEC-Core can utilize it. ...
... See alsoJohansson et al. (2009),Kverndokk and Rosendahl (2013). ...
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Climate change is a challenging and urgent problem. Common policies for combating climate change (e.g., taxes or quotas) assume perfectly competitive markets to achieve the First Best, although in reality many pollution-intensive markets are not perfectly competitive. This paper summarizes the literature that examines the most common climate policies when the market is not perfectly competitive. The literature that shows that firms with market power act strategically to manipulate prices to their advantage. When tradable permits are imposed, dominant firms manipulate both permit and output prices. When a world carbon tax is imposed, OPEC may increase or decrease the oil price depending on whether there is threatening entries. Even before a world carbon tax is imposed, OPEC strategically increases the oil price to prevent it. When a global emission target is chosen by a region unilaterally, OPEC manipulates prices to go up, which drastically decreases leakages and shifts abatement costs from the regulated regions to the unregulated regions.
... Secondly, the design of the proposed regulatory scheme adheres to the findings of Buchanan (1969) who has shown the importance of market structure in designing optimal regulation. The results of a recent paper by Kverndokk and Rosendahl (2011) also validate the importance of Buchanan's findings with respect to the oil market and transport sector in general. In particular, Kverndokk and Rosendahl found strong evidence that, in the presence of market power, effects on the oil market resulting from regulating the transport sector differ significantly from those under perfect competition. ...
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... Hence, the price responsiveness of oil demand in the EU declines, 7 and this 6 In the short run, OPEC may have to to reduce rather than increase output to maintain short-run revenues as crude oil demand and Non-OPEC supply would be rather inelastic. 7 The price elasticity of EU oil demand (which is endogenous in our CGE model) declines by 10-15% when going from the BaU scenario to the makes it more profitable for OPEC to restrict supply in order to achieve a higher price (Kverndokk and Rosendahl, 2013).Figure 2 shows the impacts in the oil market when the EU complements domestic emissions pricing with carbon tariffs on imports of EITE goods (scenario BTA). We see that the effects are quite similar to those inFigure 1 for the TAX scenario. ...
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It Is Widely Believed That Exhaustible Resource Monopolies Do Not Enjoy As Much Market Power As Standard Non Resource Monopolies, and May Even Produce in a Socially Optimum Way. We Argue That This Paradoxical Result Arises From an Inappropriate Comparison Methodology. When Similar Assumptions Are Applied to the Resource, and the Conventional, Cases, We Show That the Resource Monopoly Behaves As Expected, I.E. Restricts Supply.
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In this note we present realistic, alternative extensions to the iso-elastic, zero cost analysis which tend to bias monopolistic extraction rates in the opposite direction, that is, towards excessive resource use. The first modification allows for costs that do not vary with the extraction rate. Occurring in the form of leasing fees, capital costs, and maintenance fees, these quasi- fixed costs are incurred only during periods of production and often constitute a substantial portion of operating expenses. The second extension involves demand elasticities varying with consumption instead of time. In particular, we consider a stationary demand schedule with elasticity increasing in consumption. We have shown that in 2 special cases a monopolist depletes a natural resource faster than is optimal. Since Stiglitz (77C/1118) proves the opposite result for other special cases, the net effect of all these presumably realistic considerations is analytically indeterminate and must be ascertained empirically.-after Authors
Article
A recursively dynamic general equilibrium model featuring six world regions with trade in energy and non-energy goods is used to simulate the period from 1990 through 2100 in 10-year intervals. The simulations explore the effect of unilateral action by the OECD to curb global CO2 emissions. Unilateral cuts create incentives for free-riding by non-participating regions, so that global emissions are reduced by less than the amount that the OECD cuts back its regional emissions. Carbon "leakage" occurs through two channels. First, basic materials production increases in unconstrained regions, resulting in increased carbon intensity of GDP. Second, reductions in OECD oil imports cause the world oil price to fall, leading to an increased energy intensity in the non-participant regions. In this paper, we use a general equilibrium model to assess the extent to which these two mechanisms reduce the effectiveness of OECD reductions in curbing global CO2 concentrations.
Article
According to most scientists, greenhouse gas emissions must be reduced significantly relative to current trends to avoid dramatic adverse climatic changes during the next century. CO2 is the most important greenhouse gas, so any international agreement will certainly cover CO2 emissions. Any international agreement to reduce emissions of CO2 is going to have a significant impact on the markets for fossil fuels. The analysis shows that it is not only the amount of CO2 emissions permitted in an agreement which matters for fossil fuel prices, but also the type of agreement. Two obvious forms of agreements, which under certain assumptions both are cost efficient, are (a) tradeable emission permits, and (b) an international CO2 tax. If the fossil fuel markets were perfectly competitive, these two types of agreements would have the same effect on the producer price of fossil fuels. However, fossil fuel markets are not completely competitive. It is shown that, under imperfect competition, direct regulation of the ‘tradeable quotas’ type tends to imply higher producer prices and a larger efficiency loss than an international CO2 tax giving the same total CO2 emissions. A numerical illustration of the oil market indicates that the difference in producer prices for the two types of CO2 agreements is quite significant.
Article
One of the most hotly contested of all energy policy issues involves Corporate Average Fuel Economy (or CAFE) standards for new cars and light-duty trucks. Tighter standards would reduce gasoline consumption, and hence both greenhouse gas emissions as well as this country's vulnerability to oil price shocks. But they would also increase the price of new vehicles, worsen traffic congestion and--depending on how they are phased in--possibly even reduce occupant safety. These effects are amenable to economic analysis, and we review the evidence to date bearing on this interesting and important question.
Article
In this paper we investigate the potential production and implications of a global biofuels industry. We develop alternative approaches to consistently introduce land as an economic factor input and in physical terms into a computable general equilibrium framework. The approach allows us to parameterize biomass production consistent with agro-engineering information on yields and a "second generation" cellulosic biomass conversion technology. We explicitly model land conversion from natural areas to agricultural use in two different ways: in one approach we introduced a land supply elasticity based on observed land supply responses and in the other approach we considered only the direct cost of conversion. We estimate biofuels production at the end of the century could reach 221 to 267 EJ in a reference scenario and 319 to 368 EJ under a global effort to mitigate greenhouse gas emissions. The version with the land supply elasticity allowed much less conversion of land from natural areas, forcing intensification of production, especially on pasture and grazing land, whereas the pure conversion cost model led to significant deforestation. These different approaches emphasize the importance of somehow reflecting the non-market value of land more fully in the conversion decision. The observed land conversion response we estimate may be a short turn response that does not fully reflect the effect of long run pressure to convert land if rent differentials are sustained over 100 years.
Article
This paper examines the effects of the Corporate Average Fuel Economy Standards (CAFE) on automobile sales, prices, and fuel consumption. First, a discrete choice model of automobile demand and a continuous model of vehicle utilization are estimated using micro data from the Consumer Expenditure Survey for 1984-90. Next, the demand side model is combined with a model of oligopoly and product differentiation on the supply side. With these elements in place, the effects of the CAFE regulation are assessed through simulations and compared to the effects of alternative policy instruments, such as an increase in gasoline tax. Copyright 1998 by Blackwell Publishing Ltd
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