ENERGY TRANSITION UNDER THE RISK OF AN ENVIRONMENTAL CATASTROPHE: A TWO-SECTOR APPROACH

The energy transition to renewable energy involves two kinds of environmental
concerns. First, fossil fuels are exhaustible and second, their use generates negative externalities through environmental damages. In particular, there exist uncertain pollution thresholds above which environmental catastrophes are expected to occur. In this paper, we focus on the issue of optimal energy transition in a two-sectoreconomy (energy sector and nal good sector) with exhaustible oil reserves, renew-able energy and a pollution threat. In order to model the energy transition under a risk of of environmental damage, we consider that the economy currently uses both fossil fuels and RE, and that two regime changes may occur. One change corresponds to the adoption of renewable energy as the sole source of energy and the other one refers to the pollution catastrophe. This catastrophic environmental event happens when the stock of pollution reaches an uncertain threshold and generates a loss in utility. We solve the model numerically by using the rst order optimality conditions obtained analytically. We show that uncertainty on the oc-currence of the catastrophe induces a precautionary behaviour in the sense that it negatively aects the rate of the polluting resource extraction and urges the energy transition.