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Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture

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  • Coulomb, R.
  • Henriet, F.

Abstract

Among technological options to mitigate greenhouse gas (GHG) emissions, Carbon Capture and Storage technology (CCS) seems particularly promising. This technology allows to keep on extracting polluting fossil fuels without drastically increasing CO2 atmospheric concentration. We examine here a two-sector model with two primary energy resources, a polluting exhaustible resource and an expensive carbon-free renewable resource, in which an environmental regulation is imposed through a cap on the atmospheric carbon stock. We assume that only the emissions from one sector can be captured. Previous literature, based on one-sector models in which all emissions are capturable, finds that CCS technology should not be used before the threshold has been reached. We find that, when technical constraints make it impossible to capture emissions from both sectors, this result does not always hold. CCS technology should be used before the ceiling is reached if non capturable emissions are large enough. In that case, we find that energy prices paths must differ between sectors reflecting the difference of social cost of the resource according to its use. Numerical exercise shows that the initial carbon tax should equal 52$/t CO2 and that using CCS before the ceiling is optimal.

Suggested Citation

  • Coulomb, R. & Henriet, F., 2011. "Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture," Working papers 322, Banque de France.
  • Handle: RePEc:bfr:banfra:322
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    References listed on IDEAS

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    1. Chakravorty, Ujjayant & Magne, Bertrand & Moreaux, Michel, 2006. "A Hotelling model with a ceiling on the stock of pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2875-2904, December.
    2. Lafforgue, Gilles & Magné, Bertrand & Moreaux, Michel, 2008. "Energy substitutions, climate change and carbon sinks," Ecological Economics, Elsevier, vol. 67(4), pages 589-597, November.
    3. Jean Pierre Amigues & Gilles Lafforgue & Michel Moreaux, 2010. "Optimal capture and sequestration from the carbon emission flow and from the atmospheric carbon stock with heterogeneous energy consuming sectors," LERNA Working Papers 10.05.311, LERNA, University of Toulouse.
    4. Chakravorty, Ujjayant & Magné, Bertrand & Moreaux, Michel, 2006. "Can Nuclear Power solve the Global Warming Problem?," IDEI Working Papers 381, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Olli Tahvonen, 1997. "Fossil Fuels, Stock Externalities, and Backstop Technology," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 855-874, November.
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    Citations

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    Cited by:

    1. Amigues, Jean-Pierre & Lafforgue, Gilles & Moreaux, Michel, 2012. "Optimal Timing of Carbon Capture Policies Under Alternative CCS Cost Functions," TSE Working Papers 12-318, Toulouse School of Economics (TSE).
    2. Elke Moser & Dieter Grass & Gernot Tragler, 2016. "A non-autonomous optimal control model of renewable energy production under the aspect of fluctuating supply and learning by doing," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 38(3), pages 545-575, July.
    3. Jean-Pierre Amigues & Gilles Lafforgue & Michel Moreaux, 2014. "Optimal Timing of CCS Policies with Heterogeneous Energy Consumption Sectors," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(3), pages 345-366, March.
    4. Kollenbach, Gilbert, 2015. "Abatement, R&D and growth with a pollution ceiling," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 1-16.
    5. Amigues, Jean-Pierre & Lafforgue, Gilles & Moreaux, Michel, 2011. "Optimal CCS and air capture from heterogeneous energy consuming sectors," LERNA Working Papers 11.16.350, LERNA, University of Toulouse.
    6. Matthias Kalkuhl & Ottmar Edenhofer & Kai Lessmann, 2015. "The Role of Carbon Capture and Sequestration Policies for Climate Change Mitigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 60(1), pages 55-80, January.
    7. Moreaux, Michel & Withagen, Cees, 2015. "Optimal abatement of carbon emission flows," Journal of Environmental Economics and Management, Elsevier, vol. 74(C), pages 55-70.
    8. Amigues, Jean-Pierre & Lafforgue, Gilles & Moreaux, Michel, 2014. "Optimal Timing of Carbon Capture and Storage Policies Under Learning-by-doing," TSE Working Papers 14-472, Toulouse School of Economics (TSE).
    9. Moreaux, Michel & Withagen, Cees, 2013. "Climate Change and Carbon Capture and Storage," IDEI Working Papers 774, Institut d'Économie Industrielle (IDEI), Toulouse.
    10. Prieur, Fabien & Tidball, Mabel & Withagen, Cees, 2013. "Optimal emission-extraction policy in a world of scarcity and irreversibility," Resource and Energy Economics, Elsevier, vol. 35(4), pages 637-658.
    11. Niko Jaakkola, 2013. "Monopolistic Sequestration of European Carbon Emissions," OxCarre Working Papers 098, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

    More about this item

    Keywords

    Nonrenewable Resources; Externalities; Carbon Capture.;

    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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