Moral hazard in fossil-energy-reliant markets delays early adoption of net-zero technologies

Abstract

Summary: We use an analytical real option approach to conceptualize and formalize the interaction between long-term climate policies, such as the IRA, and short-term policies intended to protect consumers from volatile fossil-energy prices. An example of the latter is the US releasing strategic oil reserves to lower gas prices. The framework we develop suggests that those short-term policies, which effectively counter incentives created by long-term climate policies, create a moral hazard in fossil-energy-reliant markets. This, in turn, causes early adopters of net-zero technologies to delay their investment. Ultimate adopters, however, do not change their investment decision. The result of this asymmetric reaction to policies is an intensified gradient of the adoption curve of technology, which potentially puts pressure on various supply chains, the financial system, and ultimately government finances. This work is conceptual and does not include an empirical case study since data are too limited in time.

Keywords

• Economics
• Energy policy
• Energy sustainability
• Social sciences