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Depletion of fossil fuels and the impacts of global warming

  • Hoel, Michael
  • Kverndokk, Snorre

This paper combines the theory of optimal extraction of exhaustible resources with the theory of greenhouse externalities, to analyse problems of global warming when the supply side is considered. The optimal carbon tax will initially rise but eventually fall when the externality is positively related to the stock of carbon in the atmosphere. It is shown that the tax will start falling before the stock of carbon in the atmosphere reaches its maximum. If, on the other hand, the greenhouse externality depends on the rate of change in the atmospheric stock of carbon, the evolution of the optimal carbon tax is more complex. It can even be optimal to subsidise carbon emissions to avoid future rapid changes in the stock of carbon, and therefore future damages. If the externality is related to the stock of carbon in the atmosphere and there exists a non-polluting backstop technology, it will be optimal to extract and consume fossil fuels even when the price of fossil fuels is equal to the price of the backstop. The total extraction is the same as when the externality is ignored, but in the presence of the greenhouse effect, it will be optimal to slow the extraction and spread it over a longer period.

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File URL: http://www.sciencedirect.com/science/article/B6VFJ-3VV43G4-1/2/9df51404b3374d25e4d33e9b0de95ef5
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Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 18 (1996)
Issue (Month): 2 (June)
Pages: 115-136

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Handle: RePEc:eee:resene:v:18:y:1996:i:2:p:115-136
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505569

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  1. Samuel Fankhauser, 1994. "The Social Costs of Greenhouse Gas Emissions: An Expected Value Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 157-184.
  2. Nordhaus, William D., 1993. "Rolling the 'DICE': an optimal transition path for controlling greenhouse gases," Resource and Energy Economics, Elsevier, vol. 15(1), pages 27-50, March.
  3. repec:cup:cbooks:9780521322249 is not listed on IDEAS
  4. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, vol. 101(407), pages 920-37, July.
  5. Farzin, Y H, 1992. "The Time Path of Scarcity Rent in the Theory of Exhaustible Resources," Economic Journal, Royal Economic Society, vol. 102(413), pages 813-30, July.
  6. Withagen, Cees, 1994. "Pollution and exhaustibility of fossil fuels," Resource and Energy Economics, Elsevier, vol. 16(3), pages 235-242, August.
  7. Stephen C Peck & Thomas J. Teisberg, 1992. "CETA: A Model for Carbon Emissions Trajectory Assessment," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 55-78.
  8. Olli Tahvonen, 1995. "Dynamics of pollution control when damage is sensitive to the rate of pollution accumulation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 5(1), pages 9-27, January.
  9. Ulph, Alistair & Ulph, David, 1994. "The Optimal Time Path of a Carbon Tax," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 857-68, Supplemen.
  10. repec:cup:cbooks:9780521311120 is not listed on IDEAS
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