Breakthrough Renewables and the Green Paradox

We show how a fossil fuel monopoly responds to a carbon-free substitute becoming available at some uncertain point in the future if demand is isoelastic and variable extraction costs are zero but upfront exploration investment costs have to be made. Before the breakthrough, oil reserves are depleted too rapidly; afterwards, the oil depletion rate drops and the oil price jumps up by discrete amounts. Subsidizing green R&D to speed up the breakthrough speeds up oil extraction before the breakthrough, but more oil is left in situ as exploration investment is lower. The latter can offset the Green Paradox effect.