Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels

39 Pages Posted: 5 Sep 2007

See all articles by Edwin van der Werf

Edwin van der Werf

Wageningen UR - Environmental Economics and Natural Resources Group

Sjak Smulders

Tilburg University - Tilburg University School of Economics and Management; University of Calgary - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: August 2007

Abstract

We study how restricting CO2 emissions affects resource prices and depletion over time. We use a Hotelling-style model with two non-renewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and in addition are imperfect substitutes in final good production. We show that an economy facing a CO2 flow - constraint may substitute towards the relatively dirty input. As the economy tries to maximise output per unit of emissions it is not only carbon content that matters: productivity matters as well. With an announced constraint the economy first substitutes towards the less productive input such that more of the productive input is available when constrained. Preliminary empirical results suggest that it is cost-effective to substitute away from dirty coal to cleaner oil or gas, but to substitute from natural gas towards the dirtier input oil.

Keywords: Climate Policy, Non-Renewable Resources, Input Substitution

JEL Classification: O13, Q31, Q43

Suggested Citation

van der Werf, Edwin and Smulders, Jacobus (Sjak) A., Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels (August 2007). FEEM Working Paper No. 83.2007. Available at SSRN: https://ssrn.com/abstract=1010854 or http://dx.doi.org/10.2139/ssrn.1010854

Edwin Van der Werf (Contact Author)

Wageningen UR - Environmental Economics and Natural Resources Group ( email )

P.O. Box 8130
Wageningen, 6700 EW
Netherlands

Jacobus (Sjak) A. Smulders

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2920 (Phone)
+31 13 466 3042 (Fax)

HOME PAGE: http://www.uvt.nl/webwijs/english/show.html?anr=801585&lang=en

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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