The Macroeconomic Transition to a Fossil-Fuel-Free Economy*

In this paper I discuss causes and consequences of transition toward a fossil-fuel-free economy. In the long run, fossil fuel's finiteness will cause a rise in their prices and are expected to lead economies to the employment of renewable-energy sources, as an alternative to the fossil fuel currently at use. I therefore developed a general equilibrium model which makes possible to analyze the transition to a fossil-fuel-free economy, triggered by market forces and characterized by adopting a new technology for the production of energy. In the model, energy is as an intermediate good used by the economy and produced by an energy sector. Before fossil fuel price is expected to increase, investment in the old technology stops, causing a decrease in energy production and a rise in energy prices, while investment in the new technology is delayed until the energy price is higher. During the transition to the new technology, because of investment irreversibility, the old technology capital stock cannot be reduced at once and therefore it is still in use with lower returns, causing a drop in the value of the energy sector firms. * This version was not lingual edited