The black paradox

We model competition between an oil monopolist and competitive suppliers of coal and renewable energy in a dynamic general equilibrium framework. We show that market power— which disrupts the order of extraction—may lead to higher long-run emissions by encouraging early extraction of dirty fuels such as coal which would otherwise remain in the ground permanently; simply banning coal burning may be better than Pigovian taxation. Market power can of course be corrected by production subsidies to the monopolist, but when distribution affects welfare a better option is to offer subsidies to renewable energy, which force the oil monopolist to reduce her (limit) price but are never actually paid out

Keywords: biosphere economics, climate change, Coal, Market power, OPEC

Hart, R. and J. Gars. 2022. The black paradox. European Economic Review 148:104211.