Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels

J.A. Smulders, E.H. van der Werf

Research output: Working paperDiscussion paperOther research output

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Abstract

We study how restricting CO2 emissions affcts resource prices and depletion over time.We use a Hotelling-style model with two nonrenewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and that are imperfect substitutes in final good production.We study both an unexpected constraint and an anticipated constraint.Both shocks induce intertemporal substitution of resource use.When emissions are unexpectedly restricted, it is cost-effective to use high-carbon resources relatively more (less) intensively on impact if this resource is relatively scarce (abundant).If the emission constraint is anticipated, it is cost-effective to use relatively more (less) of the low-carbon input before the constraint becomes binding, in order to conserve relatively more (less) of the high-carbon input for the period when climate policy is active in case the high-carbon resource is relatively scarce (abundant).
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages31
Volume2005-119
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper
Volume2005-119

Fingerprint

environmental policy
fossil fuel
carbon
resource
resource use
cost
natural gas
substitution
coal

Keywords

  • Climate policy
  • non-renewable resources
  • input substitution

Cite this

Smulders, J. A., & van der Werf, E. H. (2005). Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels. (CentER Discussion Paper; Vol. 2005-119). Tilburg: Macroeconomics.
Smulders, J.A. ; van der Werf, E.H. / Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels. Tilburg : Macroeconomics, 2005. (CentER Discussion Paper).
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abstract = "We study how restricting CO2 emissions affcts resource prices and depletion over time.We use a Hotelling-style model with two nonrenewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and that are imperfect substitutes in final good production.We study both an unexpected constraint and an anticipated constraint.Both shocks induce intertemporal substitution of resource use.When emissions are unexpectedly restricted, it is cost-effective to use high-carbon resources relatively more (less) intensively on impact if this resource is relatively scarce (abundant).If the emission constraint is anticipated, it is cost-effective to use relatively more (less) of the low-carbon input before the constraint becomes binding, in order to conserve relatively more (less) of the high-carbon input for the period when climate policy is active in case the high-carbon resource is relatively scarce (abundant).",
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Smulders, JA & van der Werf, EH 2005 'Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels' CentER Discussion Paper, vol. 2005-119, Macroeconomics, Tilburg.

Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels. / Smulders, J.A.; van der Werf, E.H.

Tilburg : Macroeconomics, 2005. (CentER Discussion Paper; Vol. 2005-119).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels

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AB - We study how restricting CO2 emissions affcts resource prices and depletion over time.We use a Hotelling-style model with two nonrenewable fossil fuels that differ in their carbon content (e.g. coal and natural gas) and that are imperfect substitutes in final good production.We study both an unexpected constraint and an anticipated constraint.Both shocks induce intertemporal substitution of resource use.When emissions are unexpectedly restricted, it is cost-effective to use high-carbon resources relatively more (less) intensively on impact if this resource is relatively scarce (abundant).If the emission constraint is anticipated, it is cost-effective to use relatively more (less) of the low-carbon input before the constraint becomes binding, in order to conserve relatively more (less) of the high-carbon input for the period when climate policy is active in case the high-carbon resource is relatively scarce (abundant).

KW - Climate policy

KW - non-renewable resources

KW - input substitution

M3 - Discussion paper

VL - 2005-119

T3 - CentER Discussion Paper

BT - Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels

PB - Macroeconomics

CY - Tilburg

ER -

Smulders JA, van der Werf EH. Climate Policy and the Optimal Extraction of High- and Low-Carbon Fossil Fuels. Tilburg: Macroeconomics. 2005. (CentER Discussion Paper).