Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets

Frederick (Rick) van der Ploeg

No 201, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

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

Keywords: Second-best climate policy; Green Paradox; carbon budget; stranded assets; oligopolistic resource markets; limit pricing; voracious extraction; regime shift. (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Date: 2017-11-28
New Economics Papers: this item is included in nep-ene, nep-env and nep-gth
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Related works:
Journal Article: Race to burn the last ton of carbon and the risk of stranded assets (2020)
Working Paper: Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets (2017)
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