AbstractAiming to reduce the environmental damage and to ensure the energy security, more and more attention has been paid to the development of the renewable sources of energy, such as wind, solar, biofuels, etc. Indeed, as expected by the World Bank, World Energy Outlook 2017, the demand for fossil fuel, especially for the coal, would gradually decrease by 2040.
However, the non-renewable producers anticipating the decline in the demand for the non-renewable energy and the threat of the stringent environmental policies in the foreseeing future would respond by accelerating current extraction. This phenomenon in the existing literature is called the Green paradox.
This research contributes to the Green paradox literature by studying the strategic behaviour of the incumbent fossil fuel firms in oligopoly markets. I constructed a two-period game-theoretical model, whereas, renewable energy producer enters in the second period with a horizontally differentiated product and compete with the incumbent traditional energy producer(s). I show that the emergence of the phenomenon of the Green paradox depends basically on two factors: the existing market structure of the incumbent fossil fuel firm(s) and the amount of the existing resource stock.
In particular, I found that if the initial resource stock is large enough, then in the subgame perfect equilibrium of the model, the entry of the new energy will not raise current emission under the monopoly market structure, but under duopoly or oligopoly in general, such entry might provoke Green paradox. In other words, the availability of the incumbent rival(s) under oligopoly generates a negative externality to other firms, who also attempt to maximize its benefits, when shifting future exploration to the current stage, which is not the case for a monopoly firm.
My research further explores possible ways of overcoming Green Paradox. I found that the merger might be welfare maximizing under particular conditions, i.e. it is beneficial for the society to allow the existing fossil fuel duopoly to merge. The merger to a monopoly can help to mitigate the problem of Green paradox, thereby reducing the environmental damages in the first period when renewable energy is not yet available.
This research, thus, extends the existing literature of the merger control which considers exclusively competition issues and has overlooked, to the best of my knowledge, the possibility of Green paradox. The merger of the incumbent fossil fuel firms may increase the long-term social welfare, by mitigating Green Paradox to the extent that such benefit more than outweighs the loss in competition in the traditional energy sector.
|Date of Award||29 Aug 2019|
|Supervisor||Ping LIN (Supervisor) & Chi Leung Adam WONG (Co-supervisor)|