Global competition dynamics of fossil fuels and renewable energy under climate policies and peak oil: A behavioural model

We develop a stochastic decision model to analyse the global competitive dynamics of fossil fuels and renewable energy. It describes coal, oil/gas, solar and wind. These differ not only in pollution intensities but also in profitability and innovation potential. The model accounts for the effect of learning curves, path-dependence and climate policies. Adoption shares endogenously affect agents' utility through increasing returns to adoption, learning, and a ‘peak oil’ capacity constraint. We find that peak oil induces a transition to coal rather than renewable energy, which worsens climate change. By introducing climate policies - such as a carbon tax, market adoption or R&D subsidies for renewables, and eliminating existing subsidies for fossil fuels - we identify potential transition patterns to a low-carbon energy system. Model analysis clarifies two main features of climate policies: which ones solve the climate problem, i.e. do not surpass the critical carbon budget; and how uncertain or variable are final market shares of energy sources.