Estimating the effect of taxing CO2 emissions on Russian oil industry

Abstract

The impact of hypothetical restrictions on fossil fuel consumption, implemented through the introduction of a tax on CO2 emissions in the global economy and certain regions, on oil production by Russia, OPEC, and eight other major oil producers is assessed in this article. The first part of this study reviews the current literature on taxation of emissions in the global economy. Approaches to modelling such a policy and the problem of choosing the trajectory of the tax rate are analyzed, as are the main conclusions, consequences, and recommendations for the economic policy of oil exporting countries. Approaches to modelling pricing in the oil market are considered separately. The analysis shows that the premise of oligopolistic strategic interaction of oil exporters plays an important role in modelling the oil market. Subsequently, a model of strategic interaction between countries in the oil market is built according to the Cournot model. This model is calibrated using data on the parameter of demand as well as supply, including the production costs of individual exporting countries according to Rystad. Twelve scenarios for taxation of the industry through the introduction of a tax on CO2 emissions in the amount of $25, $50 and $75 dollars per ton of emissions are built. It is assumed that this tax is converted into a tax on the purchase of oil in proportion to the amount of emissions that are emitted when using each barrel of oil. For each initial value of the tax rate of the tax on emissions, cases are considered when the rate remains unchanged or increases at a constant rate of 1.5% per year. Further, the same options for taxation when applied only by developed countries are also considered. The analysis in this article shows that a gradual increase in the tax rate leads to accelerated oil production. It also reveals the significant role of the spillover effect between markets in the case of the introduction of a tax only in some countries. Thus, with the introduction of a tax of $50 per ton of emissions with an annual growth of 1.5% worldwide, the peak oil price is lower by $29.6 per barrel. With the introduction of such a tax only in developed countries, the fall in oil prices at its peak compared to the baseline scenario without taxation is $18.4 per barrel in the market where a tax was introduced, and $7.8 per barrel in a market that did not impose a tax. It is also indicated that, due to the introduction of the tax, Russia has one of the largest losses in revenue among all oil exporters.