Energy Transition Under Irreversibility: A Two-Sector Approach

Abstract

In this paper, we analyze the optimal energy transition of a two-sector economy (energy and final goods) with exhaustible oil reserves, a renewable source of energy and a pollution threat. The latter corresponds to a pollution threshold above which a part of the capital is lost (following flooding for instance). We show that the optimal energy transition path may correspond to a corner regime in which the economy starts using both resources, then crosses the pollution threshold and therefore loses a part of its capital. At the end, the sole adoption of the renewable energy is optimal only in the long run. This result is in line with the asymptotic energy transition arguments stating that the transition to "clean" energy may happen only in the long run. We also show that economy reduces the use of energy resource as long as the productivity of capital and energy services is high. Therefore, public policies should promote investments in energy innovation that targets productive sector, home appliances and buildings and helps to save both money and energy. We extend the present model to allow for additional investment in energy saving technologies. Our main results show that this additional investment favours the energy transition in the sense that it increases the time within which the economy may experience the catastrophe and the welfare of the society. For policy implications, economic instruments such as taxes on "dirty" energy, subsidies on "clean" energy or incentives for energy saving technologies need to be implemented in order to promote the energy transition. This is particularly important for developing countries that mostly rely on polluting energy resources and are the most vulnerable to climate change. But those economic instruments should be carefully designed in line with the asymptotic energy transition result.

The Dynamics of Structural and Energy Intensity Change

“…By differentiating (17) and 18, we could conclude that growth rates of relative sectoral labour shares merely depend on the differences amid sectoral technological growth rates (or sectoral prices) together with the elasticity of substitution: (20) and (21), which are, respectively, the analogs of Propositions 1 and 2 in [16]. Actually, the two propositions presented in this study are expected to serve as simplifications of those in [16].…”

“…Considering that some real economies are heavily dependent on energy importing, energy is defined as secondary energy to further satisfy the closed economy assumption. Secondary energy is produced by labour as well as primary energy assumed costless following [21]. The amount of primary energy is fixed and normalized to be 1.…”

Investment in Energy Efficiency, Adoption of Renewable Energy and Household Behavior: Evidence from OECD Countries

“…Additionally, the IRENA (2014) report states that such emissions savings, combined with energy-efficiency gains, would be sufficient to set the world on a path to prevent catastrophic climate change. Furthermore, Dato (2016) shows that it favors full transition to the sole use of renewable energy. Though investments in both energy efficiency and renewable energy are costly, they yield future gains that make them profitable after several years of use.…”

Are the impacts of wind energy reversible? Critically reviewing the research literature, the governance challenges and presenting an agenda for social science

“…Articles that discussed '(ir)reversibility' in ways irrelevant to environmental impacts were excluded: i.e. articles where irreversibility refers to the optimal timing and opportunity costs of choices in investment appraisal, as reviewed in [23,25], or thermodynamic properties of energy conversion processes. Beyond this, articles were excluded where the attention given to irreversibility, reversibility, end-oflife practices, or to energy was just too small, too lacking in data, to provide anything meaningful to review.…”