Climate change and the transition to a low carbon economy – Carbon targets and the carbon budget

Carbon intensive fuels generate a significant negative externality which is quite relevant for climate change mitigation policy. We propose a dynamic growth model where output is produced using two types of energy sources: fossil fuel and renewable energy. Fossil fuel discovery, extraction, and associated costs are incorporated in our model together with the dynamics of greenhouse gas emissions and consequent damages. Consistent with the empirical facts, our numerical solutions suggest that fossil fuels, especially coal, should not be exploited to depletion. Furthermore, renewable energy should be gradually phased in to meet targets consistent with the Paris 2015 agreement. We show that adopting those policies should slow down the growth rate of cumulative emissions; but the outcome is contingent upon the carbon emission targets set for advanced countries, as distinct from those assigned to developing countries.