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 biggest subsidizers 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 Regions7 Sectors6 Energy goods OPECIndustryOil Western Europe HouseholdsGas USAInternational shippingElectricity Rest-OECDPower generationCoal 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 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