For my environmental economics students who were intimidated by the optimal extract path material this paper might either put these fears in perspective or make things a whole lot worse.
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"Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels"
Canadian Journal of Economics/Revue canadienne d'économique, Vol. 41, No. 4, pp. 1421-1444, November/novembre 2008
SJAK SMULDERS, Tilburg University - Center and Faculty of Economics and Business Administration, University of Calgary - Economics
Email: J.A.Smulders@uvt.nl
EDWIN VAN DER WERF, University of Oldenburg - Department of Economics and Statistics
Email: edwin.vanderwerf@uni-oldenburg.de
We study how restricting CO emissions affects resource prices and depletion over time. We use a Hotelling-style model with two non-renewable fossil fuels that differ in their carbon content (e.g., coal and natural gas) and in addition are imperfect substitutes in final good production. We show that an economy facing a CO flow-constraint may substitute towards the relatively dirty input. As the economy tries to maximize output per unit of emissions it is not only carbon content that matters: productivity matters as well. With an announced constraint the economy first substitutes towards the less productive input such that more of the productive input is available when constrained. Preliminary empirical results suggest that it is cost-effective to substitute away from dirty coal to cleaner oil or gas, but to substitute from natural gas towards the dirtier input oil.
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