Abstract
We use dynamic optimization methods to analyze the development of solar technologies in light of the increasing scarcity and environmental pollution associated with fossil fuel combustion. Learning from solar R&D efforts accumulates in the form of knowledge to gradually reduce the cost of solar energy, while the scarcity and pollution externalities associated with fossil fuel combustion come into effect through shadow prices that must be included in the effective cost of fossil energy. Accounting for these processes, we characterize the optimal time profiles of fossil and solar energy supply rates and the optimal investment in solar R&D. We find that the optimal rate of fossil energy supply should decrease over time and vanish continuously upon depletion of the fossil fuel reserves, while the optimal supply of solar energy should gradually increase and eventually take over the entire energy demand. The optimal solar R&D investment should initially be set at the highest feasible rate, calling for early engagement in solar R&D programs, long before large scale solar energy production becomes competitive.
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