Energy efficiency and petroleum depletion in climate change policy

This chapter examines the validity of standard technology assumptions used in climate economy models, and explores the policy consequences of changing them to reflect actual as opposed to postulated trends. In this analysis, global oil production is determined by an augmented Hotelling model in which demand functions incorporate growth in world income and population. The equilibrium production trajectory rises in the near term, peaks, and then declines as the resource approaches depletion. Contrary to most other work, oil is replaced by an even more carbon intensive but proven energy form, such as coal or shale based synthetic fuel, for an ap[reciable length of time. At the same time, our econometric model projects energy intensity of the global economy stabilizing around the current level. This alternative arises from an analysis of historical data from the early 1970s to the present. While the scenarios explored here might be interpreted as pessimistic, we consider them highly plausible. The significant policy conclusion that emerges is the need for earlier and more aggressive climate policies than typically found in other work: the optimal control rate for carbon emissions is significantly higher. With existing and known alternative technologies significant reductions in carbon emissions are very expensive, as evidenced by the very high tax rates needed to achieve these reductions. We believe these results underli e the desirability for policies with increased emphasis on research on low cost, efficient substitutes for current technologies.