Can Market Control Help the Climate? Insights from OPEC’s Impact on Emissions

This study finds that OPEC’s market power has unintentionally reduced global carbon emissions by limiting oil production, offsetting some climate damage despite the economic inefficiencies associated with monopolistic control. The research underscores a complex policy trade-off, suggesting that market restrictions can sometimes yield environmental benefits.

A study conducted by researchers from the University of California, Duke University, KU Leuven, and MIT Sloan School of Management, explores the paradoxical environmental benefits that emerge from OPEC’s market power in the global oil industry. Typically, market power is associated with inefficiencies, as it enables firms or groups like OPEC to reduce supply, increase prices, and distort market dynamics, leading to what economists call welfare losses. However, as proposed by economist James Buchanan in 1969, market power could, in theory, yield positive effects in industries where negative externalities are significant. In the context of fossil fuels, where the externality of carbon emissions drives climate change, limiting production might reduce emissions. This research examines this hypothesis within the global oil market, assessing how OPEC’s actions have influenced carbon emissions and climate-related damages. According to the study’s estimates, between 1970 and 2021, OPEC’s control over oil production avoided more than 67 gigatons of CO₂ emissions, valued at about 4 trillion dollars in avoided climate damages based on a social cost of carbon set at 250 dollars per ton. This volume of emissions saved represents nearly 18% of the carbon budget necessary to maintain global warming below the 1.5°C target outlined in the Paris Agreement.

Volume and Composition: A Complex Balance

The researchers developed a comprehensive model comparing actual emissions with a hypothetical scenario in which the global oil market operated under perfect competition, meaning without any market power exerted by OPEC or other actors. Using extensive data from Rystad Energy and lifecycle emissions estimates from various international sources, they analyzed the emissions impact of different market conditions. In the real world, OPEC restricts oil production to maintain prices, thereby limiting the total volume of oil extracted. This restriction has led to the so-called “Volume-Effect,” where fewer barrels of oil have been produced, resulting in lower global carbon emissions than would have occurred in an unrestricted market. However, another dynamic, known as the “Composition-Effect,” complicates this picture. As OPEC limits production, non-OPEC oil fields, which are often less efficient and have higher lifecycle emissions, step in to fill the gap. Consequently, some carbon savings from lower volumes are offset by higher emissions per barrel from these dirtier sources.

How Net Emissions Are Reduced

The Volume-Effect and Composition-Effect work against each other in determining net environmental outcomes. Through their modeling, the researchers find that the Volume-Effect ultimately outweighs the Composition-Effect, resulting in a net decrease in emissions. The study shows that the additional barrels produced in a competitive market would have been drawn from OPEC’s more efficient, lower-carbon sources, lowering per-barrel emissions. However, this environmental advantage is neutralized and ultimately surpassed by the overall reduction in production enabled by OPEC’s market power, which limits total oil consumption. Their findings suggest that under perfect competition, the volume of oil produced globally would have been substantially higher due to the lower prices, increasing the volume of CO₂ released into the atmosphere. The difference, representing avoided emissions in the real world, amounted to around 67,738 megatons of CO₂, equivalent to roughly four years of current oil consumption or 1.7 years of global CO₂ emissions.

Modeling the Climate Impact

To further assess the climate impact, the researchers employed dynamic climate models, including the DICE model developed by Nobel laureate William Nordhaus, to translate these emission reductions into changes in global temperatures. They estimated that OPEC’s market power has kept global temperatures approximately 0.023°C cooler than they would be in a competitive oil market scenario. Although this temperature change might seem modest, it has meaningful implications for climate policy, especially given the long-term, cumulative impact of greenhouse gases in the atmosphere. In their analysis, the authors contextualize the scale of emissions saved by linking it to the remaining carbon budget needed to meet global climate targets. According to their estimates, the emissions reduction attributable to OPEC’s market power represents 17.8% of the remaining carbon budget required to achieve a 50% chance of limiting global warming to 1.5°C above pre-industrial levels, as per recent studies.

The Policy Dilemma of Market Inefficiency

The research underscores the complex, sometimes counterintuitive relationship between market structure and environmental outcomes. By controlling production, OPEC has inadvertently limited emissions, a situation that Buchanan’s theory of “second best” predicts: when one economic distortion is already present, adding another (in this case, market power) can sometimes lead to a better outcome than a fully undistorted market. The study’s findings highlight a dilemma for policymakers, who must weigh the inefficiencies of market power against its potential environmental benefits. While this analysis does not suggest that OPEC or similar cartels are desirable, it emphasizes that certain market distortions may contribute to emission reductions in the absence of global carbon policies. The researchers caution that this is not an argument for retaining or expanding OPEC’s influence; rather, it offers insights into the unintended environmental consequences of market power in a sector with high negative externalities. Their work points to the potential benefits of policies that manage oil production in ways that could achieve similar reductions in a more economically efficient manner, ideally without the negative welfare impacts associated with monopolistic control. Ultimately, this study illustrates how economic mechanisms, even those seen as detrimental to welfare, can yield surprising environmental benefits when examined through the lens of climate policy.