Climate Change Mitigation and OPEC Economies

Abstract

This thesis focuses on the relationship between the Organisation of Petroleum Exporting Countries (OPEC) economies and global climate change mitigation policies with a view to determining the energy exports demand security risks of OPEC member states. The successful implementation of a universally adopted climate regime has been marred with controversies as different interest groups have raised their concerns about all the options presented so far. OPEC as the major crude oil exporting group in the world has been in the forefront of these debates and negotiations. OPEC’s major concern is the envisaged adverse impacts of the industrialised countries carbon reductions on its members' economies. Several studies have shown that when industrialised countries adopt carbon dioxide emissions reduction policies in line with the United Nations Framework Convention on Climate Change, such as carbon taxes and energy efficiency strategies, OPEC’s net price of crude oil decreases at the same time as a reduction in the quantity of crude oil products sold. OPEC believes that such climate change policy-induced fall in crude oil exports revenues would have a significant negative effect on its members' economies. With the limitations related to the assumptions of the existing energy economy models on the impacts of climate change mitigation policies on OPEC’s economies (Barnett et al, 2004), this study opts for a risk based model. This model quantifies the energy exports demand security risks of OPEC members with special interest on crude oil. This study also investigates the effects of carbon reduction policies on crude oil prices vis-à-vis the impacts of crude oil prices on OPEC’s economies. To address these three main issues, this thesis adopts a three-prong approach. The first paper addresses the impacts of climate change mitigation on crude oil prices using a dynamic panel model. Results from the estimated dynamic panel model show that the relationship between crude oil prices and climate change mitigation is positive. The results also indicate that a 1% change in carbon intensity causes a 1.6% and 8.4% changes in crude oil prices in the short run and long run, respectively. The second paper focuses on the impacts of crude oil prices on OPEC economies using a panel vector auto regression (VAR) approach, highlighting the exposure of OPEC members to the volatile crude oil prices. The findings from the panel VAR model show that the relationship between OPEC members’ economic growth and crude oil prices is positive and economic growth in OPEC member states respond positively and significantly to a 10% deviation in crude oil prices by 1.4% in the short run and 1.7% in the long run. The third paper creates an index of the risks OPEC members face when there is a decline in the demand for their crude oil exports. To show these risks, this study develops two indexes to show the country level risks and the contributions to the OPEC-wide risks exposure. The results from the indexes show that OPEC members that are more dependent on crude oil exports are faced with more energy exports demand risks. The findings from this thesis are relevant for the development of a new OPEC energy policy that should accommodate the realities of a sustainable global climate regime. They are also useful to the respective governments of the countries that are members of OPEC and non-OPEC crude oil exporting countries. Finally, the outcomes of this thesis also contribute to the climate change and energy economics literature, especially for academic and subsequent research purposes.