Fighting windmills? EU industrial interests and global climate negotiations

Figure 1: Switch point

Source: Based on Tietenberg (2000, p. 134).

This development towards the use of renewable energy sources may be speed
up if the environmental costs are added to the price of fossil fuels, for example
by taxing fossil fuels or by adding the permit price of CO2 emissions. At the
same time, a renewable energy substitute may be subsidised. In this way, more
stringent CO2 reduction obligations increase the relative price of non-renewable
fossil fuels compared to renewable wind energy. Figure 1 also depicts how
governments can accelerate the switch point. If environmental costs are added
to the MCcoal and if wind energy at the same time is subsidised, both lines will
shift. MCcoal will be raised according to the added tax or permit price on CO2,
whereas MCwind will be lowered according to the subsidy. The new switch
point occurs earlier on in time at t1 with the marginal private cost of p1. As ar-
gued by Tietenberg (2000), real prices of fossil fuels have in fact been falling
(and not rising as shown in the figure) since the 1980s up until now for two rea-
sons. First, world reserves of coal, oil and gas have continued to increase. Sec-
ond, technological progress has fostered new low-cost methods of extracting
fossil fuels. For example, reopening of old mines can, due to the new technol-
ogy, be profitable. However, in the long run, reserves will be exhausted and the

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