Profitability of fossil-fuel production under different instruments in international climate policies

This article discusses how different climate policy instruments such as CO 2 taxes and renewable energy subsidies affect the profitability of fossil-fuel production, given that a fixed global climate target shall be achieved in the long term. Within an intertemporal framework, the model analyses show that CO 2 taxes reduce the short-term profitability to a greater extent than technology subsidies, since the competition from CO 2 -free energy sources does not become particularly noticeable until decades later. Due to, for example, the discounting of future revenues, most fossil-fuel producers prefer subsidies to their competitors rather than CO 2 taxes. However, this conclusion does not apply to all producers. Oil producers outside OPEC lose the most on the subsidizing of CO 2 -free energy, while CO 2 taxes only slightly reduce their profits. This is connected to OPEC's role in the oil market, as the cartel chooses to reduce its extraction significantly in the tax scenario. The results seem to be consistent with the observed behaviour of important players in the climate negotiations.