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From Coal to Clean Energy : Hotelling with a Limit on the Stock of Externalities

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swp0000.dvi From Coal to Clean Energy: Hotelling with a Limit on the Stock of Externalities Ujjayant Chakravorty, Bertrand Magné and Michel Moreaux∗ October 15, 2003 Abstract The Kyoto Protocol aims to stabilize the concentration of carbon in the atmosphere, which is mainly caused by the burning of nonrenewable resources such as coal in power generation. We ask how a ceiling on the stock of emissions may affect the textbook Hotelling model. We show that when the ceiling is binding, both the low-cost nonre- newable resource (coal) and the high-cost renewable resource (solar energy) may be used jointly. Emissions may be reduced at any given time through abatement or by replacing coal with solar energy, but not both. If energy demand declines in the long run, we ob- tain a zigzag pattern of resource use: coal is used first, followed by the joint use of coal and clean solar energy when the ceiling is tight, reverting to coal again when emissions are no longer binding, and finally to solar energy when coal is exhausted. Keywords: Climate Agreements, Energy Substitution, Global Warming, Nonrenew- able Resources, Pollution Control. JEL codes : Q12, Q32, Q41. ∗Respectively, Emory University, Atlanta, GA 30322, [email protected]; Université de Toulouse I (LEERNA), 21 Allée de Brienne, 31000 Toulouse, France, [email protected]; and Université de Toulouse I (IUF, IDEI and LEERNA), 21 Allée de Brienne, 31000 Toulouse, France, [email protected] We would like to thank Gerard Gaudet for very stimulating discussions. 1 Introduction The Kyoto Protocol proposes a limit on carbon emissions which are primarily caused by the burning of nonrenewable fossil fuels such as coal, oil and natural gas (IPCC (2001)). Although the Protocol prescribes carbon limits only for the developed countries, its stated long-term goal is stabilizing the concentration of carbon in the atmosphere.1 In this paper, we ask how a concentration target or equivalently, a ceiling

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