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

Rick can 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 carbond bufget which can be enforced with a crecible second-best renewable energy subsidy design to lock up fossil fuel and curb manipulative emissions. Such a subsidy brings forward the end of hte fossil fuel era, but accelerates fossil fuel exctraction and global warming in the short run. A weaker fossil fuel oligopoly implies that anticipation of the a given global carbon budget induces fossil producers to deplete reserves more voraciously and accelerate global warming. This ran to burn the last ton o 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 intermideiate phase of limit pricing to keep renewable energy prodyucers 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 uknown, future date makes fossil fuel extraction more voracious and accelerates global warming.

Keywords: Second-best climate policy; Green Paradox; carbon budget; strnaded assets; oligopolistic resource marker; limit pricing; voracious extraction; regime shift (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-gth
Date: 2017
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