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Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels


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  • Smulders, J.A.
  • Werf, E.H. van der

    (Tilburg University, Center for Economic Research)


We study how restricting CO2 emissions affcts resource prices and depletion over time.We use a Hotelling-style model with two nonrenewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and that are imperfect substitutes in final good production.We study both an unexpected constraint and an anticipated constraint.Both shocks induce intertemporal substitution of resource use.When emissions are unexpectedly restricted, it is cost-effective to use high-carbon resources relatively more (less) intensively on impact if this resource is relatively scarce (abundant).If the emission constraint is anticipated, it is cost-effective to use relatively more (less) of the low-carbon input before the constraint becomes binding, in order to conserve relatively more (less) of the high-carbon input for the period when climate policy is active in case the high-carbon resource is relatively scarce (abundant).

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-119.

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Date of creation: 2005
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Handle: RePEc:dgr:kubcen:2005119

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Keywords: Climate policy; non-renewable resources; input substitution;

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  1. Withagen, Cees, 1994. "Pollution and exhaustibility of fossil fuels," Resource and Energy Economics, Elsevier, vol. 16(3), pages 235-242, August.
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  1. > Environmental and Natural Resource Economics > Resource Economics
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