Economic growth and choice of energy: A simplistic strategic approach

In this paper, we present a simplistic dynamic model to analyze the tradeoff between the use of environment-friendly energy and the use of environment-polluting energy in a dynamic world characterized by players that have different interests. Our approach builds upon a neoclassical growth model, integrating different economies, and including pollution as a separate growth factor. The model is cast in a differential game framework with the open-loop information structure. In this setting, we analyze the impact of pollution over time on the fossil fuel/“green” energy ratio. Furthermore, based on a simulation study for the linearized model, we consider the question whether certain cooperative arrangements between countries having different interests can be expected in case pollution shocks occur.