Market power and fossil fuel subsidy reforms: Who should lead the call for change?

Despite the literature on fossil fuel subsidies broadly supporting a phase-out, the influence of market power on shaping policy outcomes remains uncertain. This is surprising given the influence of OPEC and the presence of economies of scale in the oil sector, which has historically been one of the largest recipients of fossil fuel subsidies. A Computable General Equilibrium (CGE) model that allows for variable endogenous markups and increasing returns is developed to compare the impact of reforms under different market structures. Results show that market power weakens the effectiveness of reforms when implemented by large net exporters such as OPEC, but leads to larger reductions in global oil consumption when carried out by the rest of the world. The article suggests that reforms should be led by net oil-importing and non-OPEC+ countries, rather than attempting to achieve a “UAE consensus” in climate coalitions.