FEEM working papers "Note di lavoro" series
2010 .014

Too Much Oil


Authors: Reyer Gerlagh
Series: Energy: Resources and Markets
Editor: Carlo Carraro
Type: Journal
Keywords: Green Paradox, Climate Change, Exhaustible Resources, Fossil Fuels
JEL n.: Q31, Q54
JEL: CESifo Economic Studies, Oxford Journals
Date: 06/2010

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.

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