When Should We Stop Extracting Nonrenewable Resources?
This article analyzes an economy where both nonrenewable resources and a costly energy resource are essential inputs in production. The extraction of the nonrenewable resources leads to emissions that increase the probability of a catastrophe. We find that, in contrast to the constant-probability case, the endogenous probability of a catastrophe implies that some nonrenewable resources might optimally be left in the ground. The larger the effect of the fossil energy use on the probability of a catastrophe, the fewer nonrenewable resources should be extracted and the earlier should be the switch to the renewable substitute. The richer a country, the earlier it should shift to the energy substitute. In the trade-off between higher consumption and a higher probability of catastrophe, even small probability changes are likely to be more important for the planner than higher consumption.
Volume (Year): 15 (2011)
Issue (Month): 04 (September)
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