Fossil Fuels, Backstop Technologies, and Imperfect Substitution

This chapter studies the transition from fossil fuels to backstop technologies in a general equilibrium model in which growth is driven by research and development. The analysis generalizes the existing literature by allowing for imperfect substitution between fossil fuels and the new energy generation technologies. It is shown that the degree of substitutability is important for the macroeconomic repercussions of the energy transition. In contrast to the perfect substitutes case, the model does not generate abrupt regime shifts, but features a prolonged period of simultaneous use of both energy sources. By inducing front-loading of fossil fuel extraction, the availability of a backstop technology leads to a Green Paradox. The model also gives rise to a `Weak Green Orthodox': an invention that increases the substitutability between fossil fuels and the backstop technology leads to a short-run decrease in fossil fuel combustion.