type of first-mover advantage exists. On the other hand, when prices for energy
from windmills fall below price of conventional energy supplies, regardless of
prevailing state of emission reductions, there is an unconditional first-mover
gain.4 Consequently, the first mover advantages of the first type related to the
climate change issue are closely connected to the relative price of energy output
of different energy producing processes.
The shift from non-renewable fossil fuels to renewable wind energy will even-
tually happen because fossil fuel reserves are being slowly exhausted, while the
wind reserves are inexhaustible, but the timing of events are, of course, impor-
tant when analysing the potentials for first mover gains. The marginal costs of
fossil-based energy production can be assumed to rise over time. For example,
coal producers have to dig deeper mines or have to use less efficient coal. Even-
tually, it may suddenly pay to switch to a renewable resource, for example from
oil to wind or solar energy in power plants. The essence of this switch (transi-
tion) point is that the marginal cost of energy production based on the substitute
of wind energy sets the upper limit of the permit price.
Figure 1 depicts these ideas graphically. The vertical axis measures the cost per
unit of energy (e.g., per mega watt) produced. The horizontal axis measures
time. Marginal costs of energy production based on fossil fuels, here coal
(MCcoal), rise over time. We use coal and wind energy as the main examples.
We assume that the marginal costs of energy production based on wind energy
are constant at p*. Within our interval, we expect that there is space and wind
enough to produce one extra unit at the same marginal cost (MCwind). Without
state intervention and regulation, it is cheaper to use coal than wind as an en-
ergy source until some future point in time, t*. After the switch point t*, wind
energy becomes increasingly cheaper compared to coal-based energy.
4 Another example is the Montreal protocol, as discussed in section 3.
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