Fossil fuels, alternative energy and economic growth

Abstract

We present a theoretical framework that incorporates energy within an endogenous growth model. The model explicitly allows for the interaction and substitution between fossil fuels, defined as a non-renewable resource derived from some fixed initial stock, and alternative energy, defined as renewable resource whose production requires capital input. The dynamics of the model depict a unique balance growth to a saddle point. The consumption path temporarily peaks, when fossil fuels are plentiful and cheap, followed by a fall, as fossil fuel become more scarce and alternative energy production has yet to take over, until finally the steady state is reached where alternative energy production fuels the entire economy. The model depicts a sort of energy rich heyday when fossil fuels are plentiful and cheap. As oil stocks fall, alternative energy sources become increasingly more viable until a time when alternative energy has almost completed replaced oil. Graphically, the model generates a hump in the growth path of consumption such that a short run “peak oil” heyday may be compared to the long run renewable energy dependent steady state.