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The Fossil Episode

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  • John Hassler
  • Hans-Werner Sinn

Abstract

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 initial 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.

Suggested Citation

  • John Hassler & Hans-Werner Sinn, 2012. "The Fossil Episode," CESifo Working Paper Series 4016, CESifo.
    • Handle: RePEc:ces:ceswps:_4016
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    References listed on IDEAS

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    1. Piesse, Jenifer & Thirtle, Colin, 2009. "Three bubbles and a panic: An explanatory review of recent food commodity price events," Food Policy, Elsevier, vol. 34(2), pages 119-129, April.
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    7. 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, April.
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    11. Mikhail Golosov & John Hassler & Per Krusell & Aleh Tsyvinski, 2014. "Optimal Taxes on Fossil Fuel in General Equilibrium," Econometrica, Econometric Society, vol. 82(1), pages 41-88, January.
    12. Hans-Werner Sinn, 2008. "Public policies against global warming: a supply side approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(4), pages 360-394, August.
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    Cited by:

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    6. Nathan Sussman & Osnat Zohar, 2016. "Has Inflation Targeting Become Less Credible? Oil Prices, Global Aggregate Demand and Inflation Expectations during the Global Financial Crisis," Bank of Israel Working Papers 2016.13, Bank of Israel.
    7. Hoel, Michael & Sletten, Thea Marcelia, 2016. "Climate and forests: The tradeoff between forests as a source for producing bioenergy and as a carbon sink," Resource and Energy Economics, Elsevier, vol. 43(C), pages 112-129.
    8. de Moura, Fernanda Senra & Barbrook-Johnson, Peter, 2022. "Using data-driven systems mapping to contextualise complexity economics insights," INET Oxford Working Papers 2022-27, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
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    More about this item

    Keywords

    hotelling rule; fossil carbon; biocarbon; transition phases; oil price; food price; global warming;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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