The Energy Transition in Political Equilibrium

• Applicant: Dr. Achim Voß
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: Funded in 2018
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 401045603

Fossil-fuel consumption causes severe environmental problems. High hopes rest on an "energy transition" towards an economy that does not rely on fossil fuels. The transition's main components are (1) reduction of fossil-fuel demand via governmental regulation with taxes, emission caps, and other instruments, (2) increased investment of energy firms in renewable-energy capacity, (3) an acceleration of technological progress in renewable-energy technologies as the expectation of higher demand for these technologies increases research and development. While the energy transition would solve a large-scale societal problem, it also creates net losers, namely, the owners of assets that are complementary to fossil fuel - for example, coal-fired power plants. Therefore, their interest groups can be expected to resist regulation. It is unclear, however, what determines the success of this political resistance and its development. Will there be a permanent opposition - or does resistance fade out while incumbent energy firms use their know-how and their financial resources to invest in renewables and contribute to technological development? Building on insights from different strands of literature including resource and energy economics and political economy, the research project aims at answering these questions using analytical economic models, including game theory and dynamic optimization. The project extends the current literature by analyzing the interaction between investment decisions and interest-group formation, and thus analyzes under which conditions energy policy is not only welfare-maximizing, but also politically feasible. The goal of the project is to develop an analytically tractable model that allows to understand political developments and that can serve as a basis for empirical applications.

• DFG Programme: Research Fellowships
• International Connection: Netherlands
• Host: Professor Jacobus Sjak A. Smulders