Energy Sector Innovation and Growth: An Optimal Energy Crisis

We study the optimal transition from fossil fuels to renewable energy in a neoclassical growth economy with endogenous technological progress in energy production. Innovations keep fossil energy costs under control even as increased exploitation raises mining costs. Nevertheless, the economy transitions to renewable energy after about 80% of available fossil fuels are exploited. The energy shadow price remains more than double current values for over 75 years around the switch time. Consumption and output growth decline sharply during the transition period, which we thus identify as an “energy crisis.†The model highlights the important role energy can play in influencing economic growth.