At the same time extraction will progress in the

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Unformatted text preview: sponses to changes in energy prices, notably the prices of coal and oil (see e.g. Bohm, 1993). If unilateral emission reduction policies induce a drop in the global demand for (especially carbon-intensive) energy sources, the world price for these goods will fall. As a consequence, the demand for these energy sources will increase in nonabating countries. The size of the respon se will depend, among other things, on supply and demand elasticities. If fossil fuels are inelastically supplied, the rate of carbon leakage (the share of emission reductions by abating countries that is offset by emission increases by nonabating countries) will be 100%, since prices will adjust such that the demand reduction by abating countries will be exactly offset by a demand increase in other countries. Demand responses depend, among other things, on the degree of market integration of each fossil fuel. Oil is a relatively homogeneous good, so the demand by one region can easily be substituted by demand from another region. Coal, however, differs strongly in type and quality over regions, and has higher transport costs per unit of energy. A fall in the price of a particular type of coal in a particular region will then not induce large substitution effects towards this type of coal in other regions. In AGE models, this effect is reflected by relatively low Armington elasticities for coal, compared to oil. In addition, the response to lower prices depends on the degree of intra-fuel substitutability as well as the degree of substitutability between energy and other inputs, such as labor and capital. 316 Oil DDW 2012 1 Yes Leakage – AT: Cheaper Than Oil 317 Last printed 9/4/2009 7:00:00 PM Oil DDW 2012 1 Oil extraction prices will always beat product prices – Alternatives can’t compete Sinn, Professor of Economics and Public Finance, University of Munich; President of the Ifo Institute for Economic Research, 09 Hans-Werner Sinn, Professor of Economics and Public Finance, University of Munich; President of the Ifo Institute for Economic Research, 09, [“THE GREEN PARADOX,” CESifo Forum, http://www.ifo.de/DocDL/forum3-09-gesamt.pdf#page=12] E. Liu Some observers pin their hopes on a different effect: that the green policies push the price of fossil fuels in the world market so far down that they fall below the extraction costs, making extraction unprofitable. Demand would then drop, as green policies intend. This hope is baseless, however, because, like old Rembrandts, resource prices are not driven by cost but by scarcity, and these hover always far above the extraction costs. That is even now the case, in the midst of the dramatic fall in prices triggered by the current economic crisis.With oil prices slightly below 60 dollars per barrel, the extraction costs including exploration in the Gulf (but not mining rights, which are part of the profit) amount to around one to oneand-a-half dollars, and even the extraction of the Canadian tar sands costs, including exploration, no more than 15 dollars. In due course, fossil fuel prices will steadily increase as the resources become scarcer.At the same time, extraction will progress in the direction of increasing extraction costs...
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