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

Keywords

  • Green Paradox
  • Green R&D
  • Regime shift

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