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The Fossile Episode

  • Hassler, John
  • Sinn, Hans-Werner

We build a two-sector dynamic general equilibrium model with one-sided substitutability between fossil carbon and biocarbon. One shock only, the discovery of the technology to use fossil fuels, leads to a transition from an inital pre-industrial phase to three following phases: a pure fossil carbon phase, a mixed fossil and biocarbon phase and an absorbing biocarbon phase. The increased competition for biocarbon during phase 3 and 4 leads to increasing food prices. We provide closed form expressions for this price increase. Our calibration leads to a price increase of 40% if capital and labor are allowed to move to the biocarbon sector. Otherwise, the price increase is much higher. We also use the model to analyze the consequences of restrictions on using biocarbon as fuel. We show that such restrictions can lead to a substantially slower global warming due to an endogenous slowdown of fossil fuel extraction.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9256.

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Date of creation: Dec 2012
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Handle: RePEc:cpr:ceprdp:9256
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  1. Derek Headey & Shenggen Fan, 2008. "Anatomy of a crisis: the causes and consequences of surging food prices," Agricultural Economics, International Association of Agricultural Economists, vol. 39(s1), pages 375-391, November.
  2. Mitchell, Donald, 2008. "A note on rising food prices," Policy Research Working Paper Series 4682, The World Bank.
  3. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," CESifo Working Paper Series 2087, CESifo Group Munich.
  4. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425.
  5. Akos Valentinyi & Berthold Herrendorf, 2008. "Measuring Factor Income Shares at the Sector Level," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 820-835, October.
  6. Sinn, Hans-Werner, 2012. "The Green Paradox: A Supply-Side Approach to Global Warming," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016680, June.
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