Climate Change, Directed Technical Change and Exhaustible Resources

Data shows increasing oil extraction rates accompanied by increasing proven reserves over the last decades. This suggests the existence of research by oil companies aimed at increasing their stocks (e.g. exploration or improved extraction techniques). Increasing oil prices act as an incentive to perform that kind of research and hence potentially postpone the development of clean alternative energies. This has consequences for optimal environmental policies. We propose a model of directed technical change with clean and dirty energy in production which is able to replicate the recent trends in the data on oil production and reserves. Our results show that ignoring research in extraction technologies leads to suboptimal climate policy and in particular carbon taxes that are too high and research subsidies that are too low