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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
119.
Find related papers by JEL classification: O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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