Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/66869
Authors: 
van der Ploeg, Rick
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper: Resources and Environment Economics 3986
Abstract: 
We show how a monopolistic owner of oil reserves responds to a carbon-free substitute becoming available at some uncertain point in the future if demand is isoelastic and variable extraction costs are zero but upfront exploration investment costs have to be made. Not the arrival of this substitute matters for efficiency, but the uncertainty about the timing of this substitute coming on stream. Before the carbon-free substitute comes on stream, oil reserves are depleted too rapidly; as soon as the substitute has arrived, the oil depletion rate drops and the oil price jumps up by a discrete amount. Subsidizing green R&D to speed up the introduction of breakthrough renewables leads to more rapid oil extraction before the breakthrough, but more oil is left in situ as exploration investment will be lower. The latter offsets the Green Paradox.
Subjects: 
hotelling principle
exhaustible resources
carbon-free substitute
regime switch
oil stock uncertainty
hold-up problem
green R&D
Green Paradox
JEL: 
D81
H20
Q31
Q38
Document Type: 
Working Paper

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