Tuesday, July 23, 2013

Global Warming and the Green Paradox

OxCarre WP: Announcing a future carbon tax or a sufficiently fast rising carbon tax encourages fossil fuel owners to extract reserves more aggressively, thus exacerbating global warming. These policies also encourage more fossil fuel to be locked in the crust of the earth which can offset adverse weak Green Paradox effects. A renewables subsidy has similar weak Green Paradox effects. Green welfare drops (strong Green Paradox) if the beneficial effects for the climate of locking up more fossil fuel outweigh the short-run weak Green Paradox effects. Neither the weak nor the strong Green Paradox occurs for the first-best Pigovian carbon tax. Within the context of a green Ramsey growth model the qualitative nature of the different phases of fossil fuel and renewables use depends crucially on the initial stocks of fossil fuel reserves and capital. We examine how climate policies are affected by growth and development, and also when not the renewable but coal is the effective backstop.

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