December 13, 2010

The Effect of CO2 Pricing on Conventional and Non-Conventional Oil Supply and Demand

by Aurélie Méjean and Chris Hope

- What would be the effect of CO2 pricing on global oil supply and demand? This paper introduces a model describing the interaction between conventional and non-conventional oil supply in a Hotelling framework and under CO2 constraints. The model assumes that non-conventional crude oil enters the market when conventional oil supply alone is unable to meet demand, and the social cost of CO2 is included in the calculation of the oil rent at that time. The results reveal the effect of a CO2 tax set at the social cost of CO2 on oil price and demand and the uncertainty associated with the time when conventional oil production might become unable to meet demand.

Méjean, A., and C. Hope (2010). "The Effect of CO2 Pricing on Conventional and Non-Conventional Oil Supply and Demand." EPRG Working Paper 1029, Sept 2010.