Race to burn the last ton of carbon and the risk of stranded assets

Rick van der Ploeg

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

A cap on global warming implies a tighter carbon budget which can be enforced with a credible second-best renewable energy subsidy designed to lock up fossil fuel and curb cumulative emissions. Such a subsidy brings forward the end of the fossil fuel era but accelerates fossil fuel extraction and global warming in the short run. A weaker fossil fuel oligopoly implies that anticipation of a given global carbon budget induces fossil producers to deplete reserves more voraciously and accelerate global warming. This race to burn the last ton of carbon is more intensive for the feedback than open-loop Nash equilibrium, so that the Green Paradox effect of a renewable energy subsidy is stronger. There is an intermediate phase of limit pricing to keep renewable energy producers at bay, which becomes much more relevant when a cap on global warming is enforced. A stronger fossil fuel oligopoly lengthens the period of limit pricing and typically brings forward the carbon-free era. Finally, the mere risk of a cap on global warming being enforced at some unknown, future date makes fossil fuel extraction more voracious and accelerates global warming.

Original languageEnglish
Article number101915
JournalEuropean Journal of Political Economy
Volume64
DOIs
Publication statusPublished - Sep 2020

Keywords

  • Carbon budget
  • Green paradox
  • Limit pricing
  • Oligopolistic resource markets
  • Regime shift
  • Second-best climate policy
  • Stranded assets
  • Voracious extraction

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