Energy Sector Innovation and Growth: An Optimal Energy Crisis∗

We study the optimal transition from fossil fuels to renewable energy in a neoclassical growth economy with endogenous technological progress in energy production. Technological innovations maintain a fairly constant cost of fossil fuel energy even as increased exploitation raises mining costs. Nevertheless, the economy transitions to renewable energy once energy costs escalate after about 80% of the available fossil fuels are exploited. The shadow price of energy remains more than double current values for over 75 years around the switch time. Consumption and investment decline relative to output during this transition period, which we thus identify as an “energy crisis.”