Monetary compensations in climate policy through the lens of a general equilibrium assessment The case of oil-exporting countries

Abstract : This paper investigates the compensations that major oil producers have claimed for since the Kyoto Protocol in order to alleviate the adverse impacts of climate policy on their economies. The amount of these adverse impacts is assessed through a general equilibrium model which endogenizes both the reduction of oil exportation revenues under international climate policy and the macroeconomic effect of carbon pricing on Middle-East's economy. We show that compensating the drop of exportation revenues does not offset GDP and welfare losses because of the time profile of the general equilibrium effects. When considering instead compensation based on GDP losses, the effectiveness of monetary transfers proves to be drastically limited by general equilibrium effects in opened economies. The main channels of this efficiency gap are investigated and its magnitude proves to be conditional upon strategic and policy choices of the Middle-East. This leads us to suggest that other means than direct monetary compensating transfers should be discussed to engage the Middle-East in climate policies.