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Energy Sector Innovation and Growth: An Optimal Energy Crisis

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Abstract:
We study the optimal transition from fossil fuels to renewable energy in a neoclassical growth economy with endogenous technological progress in energy production. Innovations keep fossil energy costs under control even as increased exploitation raises mining costs. Nevertheless, the economy transitions to renewable energy after about 80% of available fossil fuels are exploited. The energy shadow price remains more than double current values for over 75 years around the switch time. Consumption and output growth decline sharply during the transition period, which we thus identify as an "energy crisis." The model highlights the important role energy can play in influencing economic growth.

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Energy Specializations: Energy Efficiency –  Other; Energy and the Economy –Economic Growth and Energy Demand; Energy Efficiency – Barriers to Adoption; Electricity – Local Distribution; Energy Efficiency – Residential and Commercial Buildings; Electricity – Generation Technologies; Energy and the Economy – Other

JEL Codes:
Q49 - Energy: Other
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q59 - Environmental Economics: Other
D44 - Auctions
Q2 -

Keywords: Energy innovation, Energy transition, Energy cost, Economic growth

DOI: 10.5547/01956574.37.1.phar

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Published in Volume 37, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.