Breakthrough renewables and the green paradox

Frederick Van Der Ploeg*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We show how a fossil fuelmonopoly responds to a carbon-free substitute becoming available at some uncertain point in the future if demand is isoelastic and variable extraction costs are zero but upfront exploration investment costs have to be made. Before the breakthrough, oil reserves are depleted too rapidly; afterwards, the oil depletion rate drops and the oil price jumps up by discrete amounts. Subsidizing green R&D to speed up the breakthrough speeds up oil extraction before the breakthrough, but more oil is left in situ as exploration investment is lower. The latter can offset the Green Paradox effect.

Original languageEnglish
Pages (from-to)52-70
Number of pages19
JournalFinanzArchiv
Volume74
Issue number1
DOIs
Publication statusPublished - 1 Mar 2018

Funding

* University of Oxford, VU University Amsterdam, CESifo and CEPR, Manor Road Building, Oxford OX1 3UQ, United Kingdom (rick.vanderploeg@economics.ox.ac.uk). I gratefully acknowledge the support from the BP funded Oxford Centre for the Analysis of Resource Rich Economies. This essay has been prepared for a special issue of FinanzArchiv to mark Hans-Werner Sinn’s 70th birthday. I have benefited from the helpful comments of the editor Ronnie Schöb and an anonymous referee.

FundersFunder number
BP

    Keywords

    • Green Paradox
    • Green R&D
    • Regime shift

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