The Fossile Episode

35 Pages Posted: 1 Feb 2013

See all articles by John Hassler

John Hassler

Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich (LMU)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2012

Abstract

We build a two-sector dynamic general equilibrium model with one-sided substitutability between fossil carbon and biocarbon. One shock only, the discovery of the technology to use fossil fuels, leads to a transition from an inital pre-industrial phase to three following phases: a pure fossil carbon phase, a mixed fossil and biocarbon phase and an absorbing biocarbon phase. The increased competition for biocarbon during phase 3 and 4 leads to increasing food prices. We provide closed form expressions for this price increase. Our calibration leads to a price increase of 40% if capital and labor are allowed to move to the biocarbon sector. Otherwise, the price increase is much higher. We also use the model to analyze the consequences of restrictions on using biocarbon as fuel. We show that such restrictions can lead to a substantially slower global warming due to an endogenous slowdown of fossil fuel extraction.

Keywords: biocarbon, climate change, fossil fuel

JEL Classification: O41, Q32, Q54

Suggested Citation

Hassler, John and Sinn, Hans-Werner, The Fossile Episode (December 2012). CEPR Discussion Paper No. DP9256, Available at SSRN: https://ssrn.com/abstract=2210226

John Hassler (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

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Sweden
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Centre for Economic Policy Research (CEPR)

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CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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+49 89 9224 1409 (Fax)

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National Bureau of Economic Research (NBER)

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Ludwig Maximilian University of Munich (LMU)

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Germany

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