Breakthrough Renewables and the Green Paradox

22 Pages Posted: 14 Nov 2012

Date Written: November 13, 2012

Abstract

We show how a monopolistic owner of oil reserves 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. Not the arrival of this substitute matters for efficiency, but the uncertainty about the timing of this substitute coming on stream. Before the carbon-free substitute comes on stream, oil reserves are depleted too rapidly; as soon as the substitute has arrived, the oil depletion rate drops and the oil price jumps up by a discrete amount. Subsidizing green R&D to speed up the introduction of breakthrough renewables leads to more rapid oil extraction before the breakthrough, but more oil is left in situ as exploration investment will be lower. The latter offsets the Green Paradox.

Keywords: hotelling principle, exhaustible resources, carbon-free substitute, regime switch, oil stock uncertainty, hold-up problem, green R&D, green paradox

JEL Classification: D810, H200, Q310, Q380

Suggested Citation

van der Ploeg, Frederick, Breakthrough Renewables and the Green Paradox (November 13, 2012). CESifo Working Paper Series No. 3986, Available at SSRN: https://ssrn.com/abstract=2174909 or http://dx.doi.org/10.2139/ssrn.2174909

Frederick Van der Ploeg (Contact Author)

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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