Monday, May 13, 2013

Cumulative Carbon Emissions and the Green Paradox

OxCarre paper by van der Ploeg: The Green Paradox states that a gradually more ambitious climate policy such as a renewables subsidy or an anticipated carbon tax induces fossil fuel owners to extract more rapidly and accelerate global warming. However, if extraction becomes more costly as reserves are depleted, such policies also shorten the fossil fuel era, induce more fossil fuel to be left in the earth and thus curb cumulative carbon emissions. This is relevant as global warming depends primarily on cumulative emissions. There is no Green Paradox for a specific carbon tax that rises at less than the market rate of interest. Since this is the case for the growth of the optimal carbon tax, the Green Paradox is a temporary second-best phenomenon. There is also a Green Paradox if there is a chance of a breakthrough in renewables technology occurring at some random future date. However, there will also be less investment in opening up fossil fuel deposits and thus cumulative carbon emission will be curbed.

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