Fossil Fuel Extraction Under Climate Policy

This paper reviews some main studies on fossil fuel extraction under climate issues and studies a theoretical model of monopoly extraction under pollution stock ceiling constraint. We show that under constant elasticity demand and zero extraction cost, the monopolist will behave exactly the same as in the competitive case, and the existence of the ceiling constraint will initially push the extraction to grow at a rate higher than the interest rate in both monopoly and competitive case; With a non-zero extraction cost the monopoly may be under lower risk to be affected by the ceiling than the competitive case; With a constant non-zero cost, which can be either extraction cost or abatement cost, the comparison monopoly versus competitive market is identical to the comparison “social optimum with high cost” versus “social optimum with low cost”