The Fossil Energy Interlude: Optimal Building, Maintaining and Scraping a Dedicated Capital, and the Hotelling Rule

Jean-Pierre Amigues, Michel Moreaux and Manh Hung Nguyen

No 2019.07, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: It is well known that the price and consumption paths of most nonrenewable resources, including the fossil primary energies, do not follow the paths predicted by the standard Hotelling rule (Krautkraemer,1998, Gaudet, 2007). We develop a model in which a dedicated capital together with the fossil fuel are both required to produce useful energy. Starting from a state of the economy in which the fossil fuel is not yet exploited, we characterize the optimal path of the double transition: The first transition from the initial renewable energy regime to a mixed or full fossil fuel regime and later the second transition from the fossil fuel regime back to a renewable energy regime when the available stock of the fossil fuel becomes more and more rare. We show that, absent any technical progress, the useful energy price must first decrease, next be constant during the phase of maximum expansion of the fossil fuel energy consumption before entering the phase of decreasing use of the fossil energy. Only this third phase of decreasing fossil fuel consumption looks like a standard Hotelling path.

Keywords: exhaustible resources; renewables; energy transition; Hotelling rule (search for similar items in EconPapers)
JEL-codes: Q00 Q32 Q43 Q54 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2019-03
New Economics Papers: this item is included in nep-ene and nep-env
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http://faere.fr/pub/WorkingPapers/Amigues_Moreaux_Nguyen_FAERE.WP2019.07.pdf First version, 2019 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fae:wpaper:2019.07

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