Too Much Oil

20 Pages Posted: 25 Feb 2010 Last revised: 22 Apr 2010

See all articles by Reyer Gerlagh

Reyer Gerlagh

Tilburg University - Center and Faculty of Economics and Business Administration

Date Written: February 25, 2010

Abstract

Fear for oil exhaustion and its consequences on economic growth has been a driver of a rich literature on exhaustible resources from the 1970s onwards. But our view on oil has remarkably changed and we now worry how we should constrain climate change damages associated with oil and other fossil fuel use. In this climate change debate, economists have pointed to a green paradox: when policy makers stimulate the development of non-carbon energy sources to (partly) replace fossil fuels in the future, oil markets may anticipate a future reduction in demand and increase current supply. The availability of ‘green’ technologies may increase damages. The insight comes from the basic exhaustible resource model. We reproduce the green paradox and to facilitate discussion differentiate between a weak and a strong version, related to short-term and long-term effects, respectively. Then we analyze the green paradox in 2 standard modifications of the exhaustible resource model. We find that increasing fossil fuel extraction costs counteracts the strong green paradox, while with imperfect energy substitutes both the weak and strong green paradox may vanish.

Keywords: Green Paradox, Climate Change, Exhaustible Resources, Fossil Fuels

JEL Classification: Q31, Q54

Suggested Citation

Gerlagh, Reyer, Too Much Oil (February 25, 2010). FEEM Working Paper No. 14.2009. Available at SSRN: https://ssrn.com/abstract=1558962 or http://dx.doi.org/10.2139/ssrn.1558962

Reyer Gerlagh (Contact Author)

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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