Creative Destruction and Energy Transition

The energy transition is often described as a ’wall of investment’ issue. But not only renewable energy expansion must cope with the carbon free energy needs result-ing from the Paris agreement but most of the present day fossil energy production capital will have to be abandoned by the middle of the century. We consider a partial equilibrium model where energy is produced from a CO2 polluting source and a carbon free source. Crude energy transformation into energy services requires specific capital infrastructures, accumulated through a costly investment process submitted to ad-justment costs. Fossil fuels burning generates CO2 emissions and the total cumulated emissions is caped by a global atmospheric CO2 concentration stabilisation objective. We describe the socially optimal policy in this context. Prior to the phase when the society is actually constrained by the climate cap, we show that the pattern of evo-lution of the production capacities of the fossil fuel industry exhibits a three regimes structure: fist an ascending phase, followed by a stabilisation phase when the industry stops investing and its production capacity peaks before falling when approaching the time at which the climate constraint becomes binding. During the two first phases, the energy transition occurs in a context of increasing energy supply while it happens in a context of increasing energy scarcity during the last phase, capacity accumula-tion in the renewable energy industry being lower than the scraping of capacities in the fossil fuels industry. The non-monotonicity of the energy price path induces the possibility of waves of investment in the clean renewable energy sector. If fossil energy gets a larger share in the fuel mix at the beginning of the climate regulation, fossil energy production will peak at a larger level. We show that the regulator must adapt to this situation not by preventing a larger peak but by making it happen earlier, thus building initially a form of carbon ’saving’ that will be progressively consumed afterwards before the climate constrained episode.