Optimal energy transition and taxation of non-renewable resources

Abstract

This paper investigates the optimal taxation path of a non-renewable resource in the presence of an imperfect substitute renewable resource. We present an optimal growth model and characterize the social optimum and the decentralized equilibrium. We show that the economy gradually reduces the share of non-renewable resource and converges to a steady state in which it uses only the renewable resource. The decentralized economy converges to the same steady state as the social optimum in terms of capital stock and consumption whether there is a regulator intervention or not. What matters for welfare, however, is the speed at which the economy approaches the clean state that determines the level of damages to the environment. We obtain the optimal taxation rule and show that its time profile can be either always increasing, decreasing or U-shaped depending on the initial state of the economy as well as the properties of the clean state that it converges. Finally we provide some simulation results to illustrate these theoretical findings.