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A Hotelling Model with a Ceiling on the Stock of Pollution

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  • Ujjayant Chakravorty
  • Bertrand Magne
  • Michel Moreaux

Abstract

The Kyoto Protocol aims to stabilize the concentration of carbon in the atmosphere, which is mainly caused by the burning of nonrenewable resources such as coal in power generation. We ask how a ceiling on the stock of emissions may a.ect the textbook Hotelling model. We show that when the ceiling is binding, both the low-cost nonrenewable resource (coal) and the high-cost renewable resource (solar energy) may be used jointly. Emissions may be reduced at any given time through abatement or by replacing coal with solar energy, but not both. If energy demand declines in the long run, we obtain a zigzag pattern of resource use: coal is used first, followed by the joint use of coal and clean solar energy when the ceiling is tight, reverting to coal again when emissions are no longer binding, and finally to solar energy when coal is exhausted.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0321.

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Date of creation: Oct 2003
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Handle: RePEc:emo:wp2003:0321

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