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Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels

Author

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  • Smulders, J.A.

    (Tilburg University, Center For Economic Research)

  • van der Werf, E.H.

    (Tilburg University, Center For Economic Research)

Abstract

We study how restricting CO2 emissions affcts resource prices and depletion over time.We use a Hotelling-style model with two nonrenewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and that are imperfect substitutes in final good production.We study both an unexpected constraint and an anticipated constraint.Both shocks induce intertemporal substitution of resource use.When emissions are unexpectedly restricted, it is cost-effective to use high-carbon resources relatively more (less) intensively on impact if this resource is relatively scarce (abundant).If the emission constraint is anticipated, it is cost-effective to use relatively more (less) of the low-carbon input before the constraint becomes binding, in order to conserve relatively more (less) of the high-carbon input for the period when climate policy is active in case the high-carbon resource is relatively scarce (abundant).

Suggested Citation

  • Smulders, J.A. & van der Werf, E.H., 2005. "Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels," Discussion Paper 2005-119, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:07323d75-b5ab-46d8-906a-df4a6a7ba010
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    References listed on IDEAS

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    1. Martin J. Beckmann, 1974. "A Note on the Optimal Rates of Resource Exhaustion," Review of Economic Studies, Oxford University Press, vol. 41(5), pages 121-122.
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    Cited by:

    1. Adrien Vogt-Schilb & Guy Meunier & Stéphane Hallegatte, 2013. "Should marginal abatement costs differ across sectors? The effect of low-carbon capital accumulation," Post-Print hal-00816796, HAL.
    2. 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.
    3. 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.
    4. Amigues, Jean-Pierre & Chakravorty, Ujjayant & Moreaux, Michel, 2009. "Think Globally, Act Locally? Stock vs Flow Regulation of a Fossil Fuel," IDEI Working Papers 584, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. 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).
    6. 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.
    7. 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.
    8. Lecuyer, Oskar & Vogt-Schilb, Adrien, 2014. "Optimal transition from coal to gas and renewable power under capacity constraints and adjustment costs," Policy Research Working Paper Series 6985, The World Bank.
    9. Michielsen, Thomas O., 2014. "Brown backstops versus the green paradox," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 87-110.
    10. 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.
    11. Thomas Eichner & Gilbert Kollenbach & Mark Schopf, 2018. "Demand versus Supply Side Climate Policies with a Carbon Dioxide Ceiling," Volkswirtschaftliche Diskussionsbeiträge 185-18, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    12. 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.
    13. Oskar Lecuyer & Adrien Vogt-Schilb, 2014. "Optimal Transition from Coal to Gas and Renewable Power under Capacity Constraints and Adjustment Costs," Working Papers hal-01057241, HAL.
    14. 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.
    15. 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.

    More about this item

    Keywords

    Climate policy; non-renewable resources; input substitution;

    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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