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Breakthrough Renewables and the Green Paradox

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  • Frederick Van der Ploeg

Abstract

We show how a monopolistic owner of oil reserves responds to a carbon-free substitute becoming available at some uncertain point in the future if demand is isoelastic and variable extraction costs are zero but upfront exploration investment costs have to be made. Not the arrival of this substitute matters for efficiency, but the uncertainty about the timing of this substitute coming on stream. Before the carbon-free substitute comes on stream, oil reserves are depleted too rapidly; as soon as the substitute has arrived, the oil depletion rate drops and the oil price jumps up by a discrete amount. Subsidizing green R&D to speed up the introduction of breakthrough renewables leads to more rapid oil extraction before the breakthrough, but more oil is left in situ as exploration investment will be lower. The latter offsets the Green Paradox.

Suggested Citation

  • Frederick Van der Ploeg, 2012. "Breakthrough Renewables and the Green Paradox," CESifo Working Paper Series 3986, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3986
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    Cited by:

    1. repec:ces:ifobei:77 is not listed on IDEAS
    2. repec:eee:jeeman:v:89:y:2018:i:c:p:153-167 is not listed on IDEAS
    3. van der Meijden, Gerard & Ryszka, Karolina & Withagen, Cees, 2018. "Double limit pricing," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 153-167.
    4. Florian Habermacher, 2016. "Externalities in Risky Resource Markets - Optimal Taxes, Leakage and Divestment," CESifo Working Paper Series 5865, CESifo Group Munich.
    5. Frederick van der Ploeg, 2013. "Cumulative Carbon Emissions and the Green Paradox," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 281-300, June.

    More about this item

    Keywords

    hotelling principle; exhaustible resources; carbon-free substitute; regime switch; oil stock uncertainty; hold-up problem; green R&D; Green Paradox;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • 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)

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