Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 19/2010: Cutting Costs of Catching Carbon - Intertemporal effects under imperfect climate policy

Michael Hoel () and Svenn Jensen ()
Additional contact information
Michael Hoel: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Svenn Jensen: Ragnar Frisch Centre for Economic Research

Abstract: We use a two-period model to investigate intertemporal e ects of cost reductions in climate change mitigation technologies for the power sector. With imperfect climate policies, cost reductions related to carbon capture and storage (CCS) may be more desirable than comparable cost reductions related to renewable energy. The nding rests on the incentives fossil resource owners face. With regulations of emissions only in the future, cheaper renewables speed up extraction (the `green paradox'), whereas CCS cost reductions make fossil resources more attractive for future use and lead to postponement of extraction.

Keywords: climate change; exhaustible resources; carbon capture and storage; renewable energy; green paradox

JEL-codes: Q30; Q42; Q54

31 pages, November 3, 2010

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