Renewable Energy Implementation and Fossil Stock Development

For the forseeable future, sustained energy supply will require continued investment in exploring and developing new fossil reserves, and/or investment in renewable energy technologies. We study the anticipated expansion of renewable supply against the backdrop of ongoing and potential development of new fossil reserves. We characterize incentives to further investment in renewable energy capacity and find that these decline in previously developed fossil resource stocks.
For sufficiently low renewable energy costs, fossil energy will be fully replaced by renewable energy. Such a phase-out strategy additionally features the abandonment of previously developed fossil reserves only if renewable energy meets a lower cost threshold equal to fossil use cost. Finally we characterize optimal investment subsidies in the absence of Pigouvian carbon taxation and establish that subsidies are weakly increasing in developed reserves.

Joint work with Mauricio Rodriguez