Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174916
Authors: 
van der Ploeg, Frederick
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6793
Abstract: 
A cap on global warming implies a tighter carbon budget which can be enforced with a credible second-best renewable energy subsidy designed to lock up fossil fuel and curb cumulative emissions. Such a subsidy brings forward the end of the fossil fuel era, but accelerates fossil fuel extraction and global warming in the short run. A weaker fossil fuel oligopoly implies that anticipation of a given global carbon budget induces fossil producers to deplete reserves more voraciously and accelerate global warming. This race to burn the last ton of carbon is more intensive for the feedback than open-loop Nash equilibrium, so that the Green Paradox effect of a renewable energy subsidy is stronger. There is an intermediate phase of limit pricing to keep renewable energy producers at bay, which becomes much more relevant when a cap on global warming is enforced. A stronger fossil fuel oligopoly lengthens the period of limit pricing and typically brings forward the carbon-free era. Finally, the mere risk of a cap on global warming being enforced at some unknown, future date makes fossil fuel extraction more voracious and accelerates global warming.
Subjects: 
second-best climate policy
Green Paradox
carbon budget
stranded assets
oligopolistic resource markets
limit pricing
voracious extraction
regime shift
JEL: 
H21
Q51
Q54
Document Type: 
Working Paper

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