“We know that many oil-exporting countries sell petroleum products at very low prices on their domestic markets, and want to examine the reasons behind this, for example how their pricing can be affected by taxation of carbon dioxide by the oil-importing countries, and what significance this has on international negotiations on climate strategies”, says Jiegen Wei.

According to previous research in environmental economics, global warming is the greatest example of the failure of the market, and is primarily due to carbon dioxide emissions caused by all of us. The burning of fossil fuels and changes in land use, particularly deforestation, are the most important sources of emissions of greenhouse gases between 1970 and 2004, according to the United Nations climate panel (IPCC). These sources represented 56 and 17 per cent, respectively, of total emissions.

Previous economic studies have focused on the export market of the oil-exporting countries, and have ignored their domestic markets. However, these domestic markets, are, in themselves, quite sizeable, representing almost 20 per cent of the oil sales by OPEC members, and this percentage is expected to increase. Indonesia, for example, sells almost half of its oil products on its domestic market. Mexican net export has fallen drastically due to the rapidly increasing domestic market, which is, in part, due to low domestic prices.

In his research, Jiegen Wei has used a mathematical model where strategic oil importers who are concerned about climate change interact with strategic oil exporters. The study focuses on how pricing varies between the export and domestic markets. The results show that this has important consequences. The connections between different markets cause climate policy taxes in certain countries to reduce oil prices and increase oil consumption in other countries. Consequently, there is a risk that increased carbon dioxide emissions in countries without a climate policy risk will counteract the reductions of emissions occurring in the few countries that apply a carbon dioxide tax, rendering the total effect of carbon dioxide taxes different from that which we expected.

“If we are to deal with climate change, we need worldwide coordination among various countries’ carbon dioxide taxes and pricing. Efforts to convince the oil-exporting countries to end their dual pricing of oil and other energy sources can reduce carbon dioxide emissions and slow down global warming. At a time when people are increasingly advocating harmonised carbon dioxide taxation throughout the world, we believe that the special interests and the situation of the oil producers deserves separate attention”, says Jiegen Wei.

The thesis also includes studies of forestry in China, as well as a study of how the reputation of a business is affected by how well that business complies with social norms, and the role that information (e.g. about emissions) plays in this context. The thesis has been written with the support of Sida’s environmental economics capacity building programme.

By: Karin Backteman
+46 31 786 25 95