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

CentER Discussion Paper No. 2005-119

30 Pages Posted: 15 Dec 2005

See all articles by Sjak Smulders

Sjak Smulders

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

Edwin van der Werf

Wageningen UR - Environmental Economics and Natural Resources Group

Multiple version iconThere are 3 versions of this paper

Date Written: November 2005

Abstract

We study how restricting CO2 emissions affects resource prices and depletion over time. We use a Hotelling-style model with two nonrenewable fossil fuels that differ in their carbon content (e.g., coal and natural gas) and that are imperfect substitutes in final good production. We study both an unexpected constraint and an anticipated constraint. Both shocks induce intertemporal substitution of resource use. When emissions are unexpectedly restricted, it is cost-effective to use high-carbon resources relatively more (less) intensively on impact if this resource is relatively scarce (abundant). If the emission constraint is anticipated, it is cost-effective to use relatively more (less) of the low-carbon input before the constraint becomes binding, in order to conserve relatively more (less) of the high-carbon input for the period when climate policy is active in case the high-carbon resource is relatively scarce (abundant).

Keywords: climate, non-renewable resources, input substitution

JEL Classification: O13, Q31, Q43

Suggested Citation

Smulders, Jacobus (Sjak) A. and van der Werf, Edwin, Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels (November 2005). CentER Discussion Paper No. 2005-119. Available at SSRN: https://ssrn.com/abstract=869738 or http://dx.doi.org/10.2139/ssrn.869738

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

Edwin Van der Werf (Contact Author)

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

P.O. Box 8130
Wageningen, 6700 EW
Netherlands

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