Economically Exhaustible Resources in an Oligopoly-Fringe Model with Renewables

We consider a game between oligopolistic and fringe suppliers of fossil fuel from an exhaustible resource, and of producers of a renewable perfect substitute. Extraction costs are stock-dependent and strictly convex in the rate of extraction. We characterize the open-loop equilibrium analytically and perform numerical simulations with calibrated parameter values. The effects of our cost assumptions are (i) to have asymptotic, economical instead of physical exhaustion of the non-renewable resource and (ii) the existence of a non-traditional limit-pricing phase in which both fossil and renewables suppliers are active. We decompose the welfare loss of imperfect competition in a conservation and a sequence effect, and show that both can be substantial: 3.8 and 4.2 trillion US$ in the calibrated model, respectively. We also find that initial carbon emissions depend non-monotonically on the renewables subsidy rate