OPEC VERSUS KYOTO?

1
OPEC VERSUS KYOTO?
Henk Folmer
2
Outline

• What is Kyoto?
• EU emission trading
• What is OPEC?
• How likely is
• Green Paradox
• Carbon Leakage
• Environmental Capital Flight
• Is OPEC a threat to Kyoto?

3
Outline

• What is Kyoto?
• EU emission trading
• What is OPEC?
• How likely is
• Green Paradox
• Carbon Leakage
• Environmental Capital Flight
• Is OPEC a threat to Kyoto?

4
The Kyoto Protocol (KP)

• International agreement on the reduction of
  anthropogenic emissions of greenhouse gases
  (GHGs)
• Differentiated reductions to bring about equal
  burden sharing

5
Flexible Mechanisms

• The Bubble allows groups of countries to jointly
  meet their obligations
• Joint Implementation (JI) allows a country to
  meet its obligation via an abatement project in
  another Annex I country
• Clean Development Mechanism (CDM) as JI but for
  a project in a Non-Annex I country
• International Emmission Trading a transfer of
  GHG quotas among Annex I countries

6
Weaknesses and Pittfalls

• The KP is not legally binding and the penalty for
  non-compliance is basically ineffective.
• JI and CDM credits emanate from reductions
  relative to a hypothetical baseline of emissions
  that would have occurred absent the JI or CDM
  investment.
• CDM can be substituted for development aid
• For some countries the quotas are higher than
  their expected emissions (hot air)

7
Outline

• What is Kyoto?
• EU emission trading
• What is OPEC?
• How likely is
• Green Paradox
• Carbon Leakage
• Environmental Capital Flight
• Is OPEC a threat to Kyoto?

8
EU Emission Trading

• Two-stage system
• The domestic EU trading system has been
  restricted to electric power generation, iron and
  steel, pulp, paper and board and minerals
• Total number of emittors subject to trading is
  approximately11,000 which account for about 40
  of the EU GHG emissions
• 2008 proposal to extend emission trading to other
  sectors and to more GHGs

9
Trading Mechanism

• At the national level, emitters obtain an initial
  endowment for free on the basis of expected
  emissions
• A small proportion of the permits can be
  auctioned off by the national governments
• At the end of each year regulated emitters must
  surrender allowances equivalent to their
  emissions
• Shortfalls of actual emissions relative to their
  permits need to be matched through purchases

10
Weaknesses of the EU trading scheme

• National Allocation Plans subject to EC oversight
  which creates inefficiencies, regulatory
  uncertainties and delays.
• 2008 proposal EU-wide system based on harmonized
  rules under an EU authority
• Over-allocation of permits, due to allocation on
  the basis of grandfathering and the use of
  emission projections instead of verified
  emissions data
• 2008 proposal auctioning of at least 60 of the
  permits

11
Outline

• What is Kyoto?
• EU emission trading
• What is OPEC?
• How likely is
• Green Paradox
• Carbon Leakage
• Environmental Capital Flight
• Is OPEC a threat to Kyoto?

12
OPEC

• Intergovernmental organization of 13 oil
  producing exporting countries
• Mission To coordinate and unify the petroleum
  policies of its member states to ensure them a
  steady income but also to secure an efficient,
  economic and regular supply.

13
World Oil Production

• 2007 73.3 million barrels per day of which
• 45 by OPEC
• 25 by OECD countries
• 10 by the Russian Federation
• More than 75 of the world oil reserves are in
  the OPEC countries
• Saudi Arabia
• Largest producer in the world
• Posses approximately 20 of the worlds proven
  reserves
• Swing producer

14
OPEC and the Market

• OPEC has some market power because
• The price of oil has been above the marginal
  production costs since a long time
• Statements of OPEC officials have impacts on
  daily oil prices

• However OPEC countries often produce more than
  agreed upon

15
OPECs Position Relative to the KP

• OPEC countries are signatories (except Irak)
• The KP implies partial expropriation for OPEC
  countries because the taxes due to the KP raise
  the consumer price above the OPEC supply price

• Therefore
• OPECs opposition to plans to reduce oil
  consumption
• OPECs criticism of the subsidies that industrial
  countries offer to stimulate the development of
  renewable energy resources
• There is empircal evidence that OPEC will incur
  losses from the KP

16
Outline

• What is Kyoto?
• EU emission trading
• What is OPEC?
• How likely is
• The Green Paradox
• Carbon Leakage
• Environmental Capital Flight
• Is OPEC a threat to Kyoto?

17
Green Paradox
Decline of future prices
Producers feel threatened
Expand production
Acceleration global warming
18
Carbon Leakage
Advantage firms non-abating countries
Reduction policy home country
Increase emissions
Raise domestic energy prices

• Eichner and Pethig carbon leakage does not
  necessarily occur

• Burniaux and Martins leakage rates strongly
  depend on the supply elasticity of coal.

19
Environmental Capital Flight

• Firms in the abating home country migrate to
  non-abating countries

• Jeppesen and Folmer (CO2 emissions) abatement
  policy only one location factor among a large set
  of location factors.

• Van der Veen No support for environmental
  capital flight for the Netherlands

20
Outline

• What is Kyoto?
• EU emission trading
• What is OPEC?
• How likely is
• The Green Paradox
• Carbon Leakage
• Environmental Capital Flight
• Is OPEC a threat to Kyoto?

21
Do Oil Producing Countries Fear a Decline of
Future Prices ?

• Support Decreasing oil intensity of production.

• In OECD steadily decline in oil intensity by
  slightly less than 50 between 1970 and 2003 due
  to more efficient use of oil, increasing
  utilisation of alternative energy resources and a
  shift in the composition of output towards less
  oil intensive sectors

• In developing countries an increase in oil
  intensity of slightly less than 30 until 2000
  when it started marginally declining

• However, decrease in intensity has been nullified
  by an increase in the volume of output

22
The Price of Oil

• The SP Crude Oil Spot Price index increased by
  approximately 257 between 2000 and 2007
• Contribution of oil to the worlds energy supply
  decreased from 46.2 in 1973 to 35 in 2005
• The increased demand in developing countries
  compensates or exceeds the possible gradual
  reduction of oil consumption in abating countries

23
Impacts of Higher Oil Prices

• Substitution away from oil
• Stimulation of RD on
• Fuel efficiency
• Utilisation of more ecologically friendly
  alternatives

24
Impacts of The Substitution Away from Oil

• ...need not necessarilly be beneficial to the
  environment climate, nor lead to net social
  benefits since
• Oil is being substituted for coal and nuclear
• Full LCA of alternatives needs to be made
  positive CO2 vs other environmental aspects
• Eco friendly alternatives still in development
  Unable to fully substitute for fossil fuels in
  the short and medium term

25
Alternative Fuels and the Environment / Climate

• Full LCA of biofuels
• reductions in soil fertility
• competition with food crops
• loss of plant and animal habitats
• monocrops can foster disease epidemics
• Crutzen Increased use of N fertilizer which can
  contribute more to global warming than the
  reduction achieved via fossil fuel saving

26
Kyoto and the recession

• Recession has reduced the consumption of fossil
  fuels

27
Conclusions

• Both Kyoto and EU global warming policy need
  basic revision
• OPEC not a serious threat to Copenhagen
• Little support for the Green Paradox, Carbon
  Leakage and Environmental Capital Flight
• Price incentives insufficient for the development
  and introduction of alternative, environmentally
  friendly energy sources
• Climate policy
• RD policy