We study how environmental regulation in the form of a cap on aggregate emissions from a fossil fuel (e.g., coal) interacts with the arrival of a clean substitute (e.g., solar energy). The cost of the substitute is assumed to decrease with cumulative use because of learning-by-doing. We show that optimal energy prices may initially increase because of pollution regulation, but fall due to learning, and rise again because of scarcity of the resource, finally falling after transition to the clean substitute. Thus nonrenewable resource prices may exhibit cyclical behavior even in a purely deterministic setting. (C) 2012 Elsevier B.V. All rights reserved.
- Climate change
- Energy markets
- Environmental externalities
- Nonrenewable resources
- Technological change
- RESEARCH-AND-DEVELOPMENT
- TECHNOLOGICAL-CHANGE
- BACKSTOP TECHNOLOGY
- OPTIMAL EXTRACTION
- CLIMATE POLICY
- FOSSIL-FUELS
- ECONOMICS
- INNOVATION
- DEPLETION
- ABATEMENT
[Chakravorty, Ujjayant] Tufts Univ, TSE, CESifo, Dept Econ, Medford, MA 02155 USA; [Leach, Andrew] Univ Alberta, Sch Business, Edmonton, AB T6G 2R6, Canada; [Leach, Andrew] CIRANO, Edmonton, AB T6G 2R6, Canada; [Moreaux, Michel] Toulouse Sch Econ, IDEI, LERNA, F-31000 Toulouse, France
Chakravorty, U (reprint author), Tufts Univ, TSE, CESifo, Dept Econ, Medford, MA 02155 USA.