Is there really a green paradox?

Abstract

The Green Paradox states that, in the absence of an appropriate tax on CO2 emissions, subsidizing a renewable backstop such as solar or wind energy brings forward the date at which fossil fuels become exhausted and consequently global warming is aggravated. We shed light on this issue by solving a model of depletion of non-renewable fossil fuels followed by a switch to a clean renewable backstop, paying attention to timing of the switch and the amount of fossil fuels remaining unexploited. We show that the Green Paradox occurs if the backstop is relatively expensive and full exhaustion of fossil fuels is optimal, but does not occur if the backstop is sufficiently cheap relative to the cost of extracting the last drop of fossil fuels plus marginal global warming damages as then it is attractive to leave fossil fuels unexploited and thus limit CO2 emissions. We show that, without a carbon tax, subsidizing (taxing) the backstop might enhance social welfare if fossil fuel reserves are not fully (fully) exhausted. We also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist. Finally, we show that if backstop are already used and there is a new sequence of backstops becoming economically viable as the price of fossil fuels rises, a lower cost of the backstop will either postpone fossil fuel exhaustion or leave more fossil fuel in situ, thus boosting green welfare. However, if a market economy does not internalize global warming externalities and renewables have not kicked in yet, full exhaustion of fossil fuels will occur in finite time and a backstop subsidy always curbs green welfare.

Cutting costs of catching carbon—Intertemporal effects under imperfect climate policy

“…In addition he investigates carbon tax expectations when policy makers cannot commit to future tax paths. Van der Ploeg and Withagen (2010) show that expensive but not cheap backstops cause the green paradox to occur.…”

Anticipated international environmental agreements

“…It is shown that fossil fuel exporters may respond by accelerating the extraction of their stock, and thereby accelerating the accumulation of pollution, worsening the damage caused by fossil fuels. Both in Sinn (2008) and the related literature (see e.g., Sinn (2012), Van der Ploeg, and Withagen (2012), Grafton, Kompas and Long (2012) or for surveys, Van der Werf and Di Maria (2012), Withagen (2013) or Long (2014)) the source of a green paradox is the reallocation of the supply of fossil fuels that result from a greening policy.…”

Feldstein meets George: Land rent taxation and socially optimal allocation in economies with environmental externality

“…This increases carbon emissions in the short-term, creating a so-called Green Paradox which is pioneered by Sinn (2008). Grafton et al (2012) and Van der Ploeg and Withagen (2012) then characterize the conditions and timing of the carbon tax which cause such a Green Paradox. Our paper abstracts from fossil energy extraction and hence we do not address the Green Paradox.…”