Integrated Assessment in a Multi-region World with Multiple Energy Sources and Endogenous Technical Change

We construct an integrated assessment model with multiple imperfectly substitutable energy sources---including fossil fuels and "green energy"---and multiple world regions. The model also incorporates fracking and endogenous technical change directed at reducing the production costs for the different energy sources. Apart from the oil price, all endogenous variables have closed-form solutions. We derive four main results. First, if only Europe were to implement optimal taxes, this would have negligible effects on reducing global warming. Second, an effective carbon tax must be levied also on oil that is produced with fracking technology. Third, a coal tax that is proportional to the coal price is completely impotent. Fourth, per-unit taxes are effective in mitigating global warming. In this case, endogenous technical change reinforces the effectiveness of carbon taxes. In an extension still to be included, we include trade in the model while still producing a semi-closed form solution (only the current prices of trade goods need to be solved numerically).