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

Author

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  • Edwin van der Werf

    (Kiel Institute for the World Economy)

  • Sjak Smulders

    (University of Calgary and Tilburg University)

Abstract

We study how restricting CO2 emissions affects resource prices and depletion over time. We use a Hotelling-style model with two non-renewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and in addition are imperfect substitutes in final good production. We show that an economy facing a CO2 flow-constraint may substitute towards the relatively dirty input. As the economy tries to maximise output per unit of emissions it is not only carbon content that matters: productivity matters as well. With an announced constraint the economy first substitutes towards the less productive input such that more of the productive input is available when constrained. Preliminary empirical results suggest that it is cost-effective to substitute away from dirty coal to cleaner oil or gas, but to substitute from natural gas towards the dirtier input oil.

Suggested Citation

  • Edwin van der Werf & Sjak Smulders, 2007. "Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels," Working Papers 2007.83, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2007.83
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    References listed on IDEAS

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    Cited by:

    1. Michielsen, T.O., 2011. "Brown Backstops versus the Green Paradox (Revision of CentER DP 2011-076)," Other publications TiSEM 7dc5a955-80bb-4069-bdbf-d, Tilburg University, School of Economics and Management.
    2. Amigues, Jean-Pierre & Chakravorty, Ujjayant & Moreaux, Michel, 2010. "The Effect of Local and Global Pollution Mandates on a Nonrenewable Resource," Working Papers 2010-2, University of Alberta, Department of Economics, revised 01 Oct 2010.
    3. M. Scott Taylor & Moreno, "undated". "A Spatial Approach to Energy Economics: Theory, Measurement and Empirics," Working Papers 2014-67, Department of Economics, University of Calgary, revised 29 Sep 2014.
    4. 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 Kiel).
    5. 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.
    6. Frederick Van Der Ploeg & Cees Withagen, 2014. "Growth, Renewables, And The Optimal Carbon Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(1), pages 283-311, February.
    7. 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.
    8. Adrien Vogt-Schilb & Guy Meunier & Hallegatte Stéphane, 2013. "Should marginal abatement costs differ across sectors? The effect of low-carbon capital accumulation," Post-Print hal-00829420, HAL.
    9. Ujjayant Chakravorty & Michel Moreaux & Mabel Tidball, 2008. "Ordering the Extraction of Polluting Nonrenewable Resources," American Economic Review, American Economic Association, vol. 98(3), pages 1128-1144, June.
    10. Chakravorty, Ujjayant & Magné, Bertrand & Moreaux, Michel, 2008. "A dynamic model of food and clean energy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1181-1203, April.
    11. Michielsen, Thomas O., 2014. "Brown backstops versus the green paradox," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 87-110.
    12. 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.
    13. Amigues, Jean-Pierre & Chakravorty, Ujjayant & Moreaux, Michel, 2009. "Think Globally, Act Locally? Stock vs Flow Regulation of a Fossil Fuel," TSE Working Papers 09-115, Toulouse School of Economics (TSE).
    14. 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.
    15. 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.
    16. Thomas Eichner & Gilbert Kollenbach & Mark Schopf, 2023. "Demand- Versus Supply-Side Climate Policies with a Carbon Dioxide Ceiling," The Economic Journal, Royal Economic Society, vol. 133(652), pages 1371-1406.
    17. 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.
    18. 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.
    19. Renaud Coulomb & Oskar Lecuyer & Adrien Vogt-Schilb, 2019. "Optimal Transition from Coal to Gas and Renewable Power Under Capacity Constraints and Adjustment Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 557-590, June.
    20. 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.

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    More about this item

    Keywords

    Climate Policy; Non-Renewable Resources; Input Substitution;
    All these keywords.

    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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