Fossil Fuels, Stock Externalities, and Backstop Technology

Abstract

The Hotelling exhaustible resource model is extended to include stock pollution and nonpolluting backstop technology. It is shown that an optimal energy consumption strategy typically includes a regime in which the two energy sources are consumed simultaneously. Along this regime, fossil fuel consumption decreases and backstop consumption increases. Together, fossil fuel and backstop consumption may form eleven optimal regime combinations. A decrease in the backstop price decreases the initial level of optimal emission tax.

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