On the contrary, under similar conditions such a subsidy may cause a decrease in initial extraction under monopolistic resource supply. Under perfect competition with constant unit extraction cost, constant unit production cost of renewables and perfect substitution between the resource and renewables, a subsidy on renewable energy typically causes a Green Paradox. A Green Paradox is said to occur if (announced) climate policies lead to an increase in current carbon emissions. Furthermore, we numerically examine Green Paradox effects of an increase in the subsidy on renewable energy. The numerical analysis also indicates that the effect of market power on climate damage may be non-monotonic, due to the counteracting sequence effect (causing front-loading of dirty extraction) and conservation effect (causing undersupply of the non-renewable resource) of imperfect competition. Third, although the sequence effect is robust with respect to changes in the utility function, it depends negatively on the degree of market power and it vanishes if the number of oligopolists becomes large. Second, we find that there might be substantial quantitative differences between the different subclasses of demand functions when it comes to inefficiencies, but what is preserved from the earlier studies is the prevalence of the sequence effect as a cause of the inefficiency. First, it appears that the equilibrium with isoelastic demand qualitatively closely resembles the linear demand case. Empirical work has shown that OPEC does not act cohesively but rather as a group of oligopolists. We also check that the sequence effect and its relative importance are due to market power by allowing for OPEC’s degree of market power to vary. In particular, we will characterize qualitatively the equilibrium for isoelastic demand and examine quantitatively the inefficiencies for different subclasses of HARA (hyperbolic absolute risk aversion) utility functions. The aim of the present paper is to investigate the robustness of this conclusion with respect to the specification of demand. This is an important result that has repercussions on the type of policies that should be considered when dealing with fossil fuels and the role they play in climate change. A calibrated version of the model with a cohesive cartel revealed that the former source of inefficiency, called the sequence effect, dwarfs the combined effect of the latter two to a large degree. This is in addition to the two well-known sources of inefficiency stemming from undersupply due to market power and oversupply due to the climate externality. If the marginal costs of extraction (including climate damages from carbon emissions) by these two types of suppliers differ, as assumed, this feature gives rise to an inefficiency since an expensive resource is exploited before the cheaper resource is depleted. It is shown for linear demand schedules that in the open-loop Nash equilibrium, where players choose extraction paths, there is always a phase with simultaneous supply of oil by the fringe and the oligopolists. In addition, there is a competitive fringe and there are producers of a perfect renewable substitute, also supplied competitively. Demand is met by OPEC, an entity which market power can be that of a cohesive cartel, or can be proxied by the outcome of an oligopoly. in which we have developed a dynamic game of the oil market. In this paper, we setup an oligopoly-fringe model of a non-renewable resource market to assess the implications of imperfect competition in markets for fossil fuel on (i) welfare and climate damages and (ii) the occurrence of the so-called Green Paradox. Furthermore, we show that climate damage and Green Paradox effects depend non-monotonically on the degree of market power. It becomes smaller as market power decreases. In our benchmark calibration, we find for the three HARA subclasses that the sequence effect is responsible for almost all of the welfare loss compared to the first-best. We calibrate our model to the oil market to quantify this sequence effect. There always exists a phase of simultaneous supply of the oligopolists and the fringe, implying an inefficient order of use of resources since the oligopolists have smaller unit extraction costs and carbon emissions than the fringe. For isoelastic demand, we characterize the equilibrium extraction rates of the fringe and the oligopolists. We explore different subclasses of HARA utility functions (Cobb–Douglas, power and quadratic utility) to check the robustness of results found in the previous literature. Inspired by empirical evidence from the oil market, we build a model of an oligopoly facing a fringe as well as competition from renewable resources.
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