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The Gas Trap: Outcompeting Coal vs. Renewables

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Listed:
  • Bård Harstad
  • Katinka Holtsmark

Abstract

We analyze a fundamental dilemma and time-inconsistency problem facing a climate coalition producing natural gas. In the short term, it is tempting to export more to outcompete coal. When this policy is anticipated, however, investments in renewables fall and emissions ultimately increase. When the coalition cannot pre-commit, its policies will be counterproductive. We discuss the robustness of this result and possible solutions. If the coalition can invest directly in renewables, for instance, the incentive to maintain a high price on exports can mitigate the temptation to reduce the price to outcompete coal. Under certain conditions, the commitment outcome can be implemented.

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  • Bård Harstad & Katinka Holtsmark, 2024. "The Gas Trap: Outcompeting Coal vs. Renewables," NBER Working Papers 32718, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32718
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    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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