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Breakthrough renewables and the green paradox

Abstract:

We show how a monopolistic owner of oil reserves responds to a carbon-free substitute becoming available at some uncertain point in the future if demand is isoelastic and variable extraction costs are zero but upfront exploration investment costs have to be made. Not the arrival of this substitute matters for efficiency, but the uncertainty about the timing of this substitute coming on stream. Before the carbon-free substitute comes on stream, oil reserves are depleted too rapidly; as soon as...

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Publication status:
Published

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Publisher:
University of Oxford
Series:
OxCarre Papers
Publication date:
2012-08-14
Paper number:
91

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