Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels
AbstractWe study how restricting CO2 emissions affects resource prices and depletion over time. We use a Hotelling-style model with two non-renewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and in addition are imperfect substitutes in final good production. We show that an economy facing a CO2 flow-constraint may substitute towards the relatively dirty input. As the economy tries to maximise output per unit of emissions it is not only carbon content that matters: productivity matters as well. With an announced constraint the economy first substitutes towards the less productive input such that more of the productive input is available when constrained. Preliminary empirical results suggest that it is cost-effective to substitute away from dirty coal to cleaner oil or gas, but to substitute from natural gas towards the dirtier input oil.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2007.83.
Date of creation: Aug 2007
Date of revision:
Climate Policy; Non-Renewable Resources; Input Substitution;
Other versions of this item:
- Sjak Smulders & Edwin van der Werf, 2008. "Climate policy and the optimal extraction of high- and low-carbon fossil fuels," Canadian Journal of Economics, Canadian Economics Association, vol. 41(4), pages 1421-1444, November.
- Smulders, J.A. & Werf, E.H. van der, 2005. "Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels," Discussion Paper, Tilburg University, Center for Economic Research 2005-119, Tilburg University, Center for Economic Research.
- 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; Prices
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-AGR-2007-09-16 (Agricultural Economics)
- NEP-ALL-2007-09-16 (All new papers)
- NEP-ENE-2007-09-16 (Energy Economics)
- NEP-ENV-2007-09-16 (Environmental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Withagen, Cees, 1994. "Pollution and exhaustibility of fossil fuels," Resource and Energy Economics, Elsevier, Elsevier, vol. 16(3), pages 235-242, August.
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