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Substitution between bio-fuels and fossil fuels: is there a Green Paradox?

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  • Quentin Grafton
  • Tom Kompas
  • Ngo Van Long

Abstract

We show that (i) subsidies for renewable energy policies with the intention of encouraging substitution away from fossil fuels may accentuate climate change damages by hastening fossil fuel extraction, and that (ii) the opposite result holds under some specified conditions. We focus on the case of subsidies for renewable resources produced under increasing marginal costs, and assume that both the renewable resources and the fossil fuels are currently in use. Such subsidies have a direct effect and an indirect effect working in opposite directions. The direct effect is the reduction in demand for fossil fuels at any given price. The indirect effect is the reduction in the current equilibrium price for fossil fuels, which tends to increase the amount of fossil fuels demanded. Whether the sum of the two effects will actually result in an earlier or later date of exhaustion of the stock of fossil fuels depends on the curvature of the demand curve for energy and of the supply curve for the renewable substitute. Nous montrons que (i) la subvention de la production d'énergie renouvelable avec l'intention d'encourager la substitution des combustibles fossiles pourrait accentuer les dommages du changement climatique en accélérant l'extraction des combustibles fossiles, et que (ii) ce résultat est renversé dans certaines conditions spécifiées. Nous nous concentrons sur le cas des subventions pour des ressources renouvelables produites dans le cadre des coûts marginaux croissants, et supposons que les ressources renouvelables et les carburants fossiles sont actuellement en cours d'utilisation. Ces subventions ont un effet direct et un effet indirect dans des directions opposées. L'effet direct est la réduction de la demande de combustibles fossiles à un prix donné. L'effet indirect est la réduction du prix d'équilibre actuelle de carburants fossiles, ce qui tend à augmenter la demande de combustibles fossiles. La somme des deux effets peut avancer ou retarder la date de l'épuisement du stock de ressources non-renouvelables selon la courbure de la courbe de la demande d'énergie et de la courbe d'offre pour le substitut renouvelable.

Suggested Citation

  • Quentin Grafton & Tom Kompas & Ngo Van Long, 2012. "Substitution between bio-fuels and fossil fuels: is there a Green Paradox?," CIRANO Working Papers 2012s-10, CIRANO.
    • Handle: RePEc:cir:cirwor:2012s-10
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    More about this item

    Keywords

    Subsidies of renewable energy; the Green Paradox; climate change.; Subvention des ressources renouvelables; le Paradoxe Vert ; changements climatiques;
    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
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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