The Gas Trap: Outcompeting Coal vs. Renewables

We analyze a fundamental dilemma and time-inconsistency problem facing climate-concerned producers of natural gas. In the short term, it is tempting to produce more to outcompete coal. When this policy is anticipated, however, investments in renewables fall and emissions may ultimately increase. When the gas producers cannot pre-commit, its policies can be counterproductive. A simulated version applied to Europe verifies that the gas trap is quantitatively important. We discuss the robustness of this result and possible solutions, ranging from direct investments in renewables to taxes on the search and exploration of gas.