Energy Transition Under Irreversibility: A Two-Sector Approach

This paper analyses the optimal energy transition of a two-sector economy (energy and final goods) under irreversible environmental catastrophe. First, it proposes a general appraisal of optimal switching problems related to energy transition showing: (1) the possibility of a catastrophe due to accumulation of pollution; and (2) technological regimes with the adoption of renewable energy. Second, it numerically shows that for given baseline parameter values, the most profitable energy transition path may correspond to the one in which the economy starts using both resources, crosses the pollution threshold by losing a part of its capital, and never adopts only clean energy. Third, it extends the model to allow for additional investment in energy saving technologies. We then find that this additional investment favours full transition to the sole use of renewable energy. It is then profitable to take advantage of these synergies by jointly promoting deployment of clean energy and providing incentives for investment in energy saving technologies.