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Climate policy and the optimal extraction of high‐ and low‐carbon fossil fuels

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  • Sjak Smulders
  • Edwin Van Der Werf

Abstract

. We 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 maximize 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. On étudie comment les restrictions sur les émissions de CO2 affectent les prix des ressources et leur épuisement dans le temps. On utilise un modèle à la Hotelling avec deux combustibles fossiles qui diffèrent dans leur concentration de carbone (e.g., charbon et gaz naturel) et sont des substituts imparfaits dans la production du bien final. On montre qu'une économie soumise à une contrainte sur les émissions peut substituer en faveur du combustible relativement plus sale. A proportion que l'économie essaie de maximiser son produit par unité d'émission, ce n'est pas seulement la concentration de carbone qui compte mais il y a aussi la productivitéà prendre en compte. Quand la contrainte est annoncée, l'économie tend à utiliser davantage l'intrant le moins productif de façon à ce que davantage de l'intrant productif soit disponible quand la contrainte entrera en vigueur. Des résultats empiriques préliminaires suggèrent qu'il est effectif au plan des coûts de substituer au charbon sale du gaz ou du pétrole plus nets, mais aussi de remplacer le gaz naturel par un intrant pétrole plus sale.

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  • Sjak Smulders & Edwin Van Der Werf, 2008. "Climate policy and the optimal extraction of high‐ and low‐carbon fossil fuels," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(4), pages 1421-1444, November.
    • Handle: RePEc:wly:canjec:v:41:y:2008:i:4:p:1421-1444
    DOI: 10.1111/j.1540-5982.2008.00510.x
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    Cited by:

    1. Narita, Daiju, 2010. "Climate policy, technology choice, and multiple equilibria in a developing economy," Kiel Working Papers 1590, Kiel Institute for the World Economy (IfW Kiel).
    2. van der Ploeg, Frederick & Withagen, Cees, 2012. "Is there really a green paradox?," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 342-363.
    3. Chakravorty, Ujjayant & Leach, Andrew & Moreaux, Michel, 2012. "Cycles in nonrenewable resource prices with pollution and learning-by-doing," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1448-1461.
    4. Adrien Vogt-Schilb & Guy Meunier & Hallegatte Stéphane, 2013. "Should marginal abatement costs differ across sectors? The effect of low-carbon capital accumulation," Post-Print hal-00829420, HAL.
    5. Ujjayant Chakravorty & Michel Moreaux & Mabel Tidball, 2008. "Ordering the Extraction of Polluting Nonrenewable Resources," American Economic Review, American Economic Association, vol. 98(3), pages 1128-1144, June.
    6. Chakravorty, Ujjayant & Magné, Bertrand & Moreaux, Michel, 2008. "A dynamic model of food and clean energy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1181-1203, April.
    7. Michielsen, Thomas O., 2014. "Brown backstops versus the green paradox," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 87-110.
    8. Adrien Vogt-Schilb & Guy Meunier & Stéphane Hallegatte, 2013. "Should marginal abatement costs differ across sectors? The effect of low-carbon capital accumulation," Working Papers hal-00850682, HAL.
    9. Hoel, Michael & Jensen, Svenn, 2012. "Cutting costs of catching carbon—Intertemporal effects under imperfect climate policy," Resource and Energy Economics, Elsevier, vol. 34(4), pages 680-695.
    10. Michielsen, T.O., 2011. "Brown Backstops versus the Green Paradox (Revision of CentER DP 2011-076)," Discussion Paper 2011-110, Tilburg University, Center for Economic Research.
    11. Frederick Van Der Ploeg & Cees Withagen, 2014. "Growth, Renewables, And The Optimal Carbon Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(1), pages 283-311, February.
    12. Andreas A. Renz & Christoph Weber, 2012. "A Hotelling Model for Fixed-Cost Driven Power Generation," EWL Working Papers 1206, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jan 2013.
    13. Renaud Coulomb & Oskar Lecuyer & Adrien Vogt-Schilb, 2019. "Optimal Transition from Coal to Gas and Renewable Power Under Capacity Constraints and Adjustment Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 557-590, June.
    14. Michielsen, T.O., 2011. "Brown Backstops versus the Green Paradox (Revision of CentER DP 2011-076)," Other publications TiSEM 7dc5a955-80bb-4069-bdbf-d, Tilburg University, School of Economics and Management.
    15. Amigues, Jean-Pierre & Chakravorty, Ujjayant & Moreaux, Michel, 2010. "The Effect of Local and Global Pollution Mandates on a Nonrenewable Resource," Working Papers 2010-2, University of Alberta, Department of Economics, revised 01 Oct 2010.
    16. M. Scott Taylor & Moreno, "undated". "A Spatial Approach to Energy Economics: Theory, Measurement and Empirics," Working Papers 2014-67, Department of Economics, University of Calgary, revised 29 Sep 2014.
    17. Amigues, Jean-Pierre & Chakravorty, Ujjayant & Moreaux, Michel, 2009. "Think Globally, Act Locally? Stock vs Flow Regulation of a Fossil Fuel," TSE Working Papers 09-115, Toulouse School of Economics (TSE).
    18. Di Maria, Corrado & Smulders, Sjak & van der Werf, Edwin, 2012. "Absolute abundance and relative scarcity: Environmental policy with implementation lags," Ecological Economics, Elsevier, vol. 74(C), pages 104-119.
    19. Thomas Eichner & Gilbert Kollenbach & Mark Schopf, 2023. "Demand- Versus Supply-Side Climate Policies with a Carbon Dioxide Ceiling," The Economic Journal, Royal Economic Society, vol. 133(652), pages 1371-1406.
    20. Thomas Michielsen, 2013. "Brown Backstops Versus the Green Paradox," OxCarre Working Papers 108, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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    More about this item

    JEL classification:

    • O13 - Economic Development, Innovation, 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

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