Moral hazard in fossil energy markets delays early adoption of zero-greenhouse gas emitting technologies

We use a real option approach to formalize the interaction between long-term climate policies, such as the Inflation Reduction Act, and short-term policies intended to protect consumers from volatile fossil energy prices. Examples of the latter are the US releasing strategic oil reserves to lower gas prices and European countries lowering their VAT on natural gas. We find that those short-term policies, which effectively counter incentives created by long-term climate policies, create a moral hazard in fossil energy markets. This, in turn, causes early adopters of zero-greenhouse gas emitting 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.