Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2026-06-11
Number: 26-030/VIII
Author-Name: Hassan Benchekroun
Author-Workplace-Name: McGill University
Author-Name: Simon Elgersma
Author-Workplace-Name: Rijksuniversiteit Groningen
Author-Name: Gerard van der Meijden
Author-Workplace-Name: Vrije Universiteit Amsterdam 
Author-Name: Cees Withagen
Author-Workplace-Name: Vrije Universiteit Amsterdam 
Title: When OPEC Leads and the Fringe Follows: A Climate Story
Abstract: We study how market power, leadership, and commitment affect oil extraction and climate outcomes in a cartel-fringe model with renewables and a backstop technology. Comparing competitive, Nash-Cournot, open-loop, and feedback von Stackelberg equilibria, we show that market power and leadership can either increase or reduce climate damages, depending on commitment, cost and emission factor heterogeneity, and relative resource stocks. In a benchmark with a social cost of carbon of 250 USD/tC, market power without leadership lowers climate damages by 3.9 trillion USD relative to perfect competition. With leadership, these gains fall to 3.1 trillion USD when the leader can commit and to 2.6 trillion USD without commitment. Small changes in resource stocks, cost parameters, or climate policy can trigger regime shifts with discontinuous welfare and climate effects. Carbon taxes and backstop subsidies can remove sequencing distortions but may weaken the conservation effect of market power. When the cartel cannot commit, the second-best carbon tax lies well below the Pigouvian level yet often delivers near-first-best welfare. Finally, we show that market power and leadership may reduce cartel profits.
Classification-JEL: C72, Q30, Q38, Q42
Keywords: cartel-fringe, climate policy, renewables, dynamic game, von Stackelberg equilibrium
File-URL: https://papers.tinbergen.nl/26030.pdf
File-Format: application/pdf
File-Size: 1.349.977 bytes
Handle: RePEc:tin:wpaper:20260030