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Climate Policy and Nonrenewable Resources

Climate Policy and Nonrenewable Resources: The Green Paradox and Beyond

Karen Pittel
Rick van der Ploeg
Cees Withagen
Copyright Date: 2014
Published by: MIT Press
Pages: 304
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  • Book Info
    Climate Policy and Nonrenewable Resources
    Book Description:

    Recent developments suggest that well-intended climate policies--including carbon taxes and subsidies for renewable energy -- might not accomplish what policy makers intend. Hans-Werner Sinn has described a "green paradox," arguing that these policies could hasten global warming by encouraging owners of fossil fuel reserves to increase their extraction rates for fear that their reserves will become worthless. In this volume, economists investigate the empirical and theoretical support for the green paradox. Offering detailed and rigorous analyses of the forces and assumptions driving Sinn's argument, the contributors consider whether rising carbon tax rates inevitably speed up climate change; the effects of the design of resource markets, the availability of clean substitutes, and the development of new technologies; and the empirical evidence (or lack thereof) for the green paradox result. They consider extraction costs; sustainability and innovation; timing, announcement effects, and time consistency in relation to policy measures; and empirical results for the green paradox phenomena under several alternative policy measures.ContributorsJulien Daubanes, Corrado Di Maria, Carolyn Fischer, Florian Habermacher, Michael Hoel, Darko Jus, Gebhard Kirchgassner, Ian Lange, Pierre Lasserre, Volker Meier, Karen Pittel, Stephen Salant, Frank Stähler, Gerard van der Meijden, Frederick van der Ploeg, Edwin van der Werf, Ngo Van Long, Ralph A. Winter, Cees Withagen

    eISBN: 978-0-262-31983-6
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)

    This book is part of the CESifo Seminar Series. The series aims to cover topical policy issues in economics from a largely European perspective. The books in this series are the products of the papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at Ludwig-Maximilians-Universität, Munich, and the Ifo Institute for Economic Research. All publications in this series have been carefully selected and refereed by members of the CESifo research network....

  4. 1 The Green Paradox: A Mirage?
    (pp. 1-18)
    Karen Pittel, Rick van der Ploeg and Cees Withagen

    The interrelation between economics and the environment has posed a number of difficult challenges in the course of history of which climate change is universally considered to be the probably biggest faced so far. The global scale and long-run nature of climate change, the diversity of regional impacts, and the uncertainties involved render policy advice on how to mitigate emissions from fossil fuels efficiently extremely difficult. Due to this complexity a vast literature has developed in the field of climate change not only in natural sciences but also in economics.

    In the past, economic analysis of climate policy dealt with...

  5. I Extraction Costs

    • 2 Supply-Side Climate Policy and the Green Paradox
      (pp. 21-42)
      Michael Hoel

      Unless all countries cooperate on demand-side climate policies such as a carbon tax, it is well-known that the attempts of some countries to reduce carbon emissions through demand-side climate policies, such as a carbon tax or emission quotas, may be undermined by increased emission by other countries, so-called carbon leakage. An early discussion of this was given by Bohm (1993), who also discussed alternative policies that to a less extent were vulnerable to carbon leakage. One of the policies discussed by Bohm was supply-side policies, namely policies aimed at reducing the supply of fossil fuels instead of the use of...

    • 3 The Green Paradox as a Supply Phenomenon
      (pp. 43-56)
      Julien Daubanes and Pierre Lasserre

      The so-called green paradox refers to the fact that future, anticipated policies aiming at reducing the demand for an extracted exhaustible resource increase the present or near future equilibrium rate of extraction of that resource. Hans-Werner Sinn (2008) coined the expression, implying “that good intentions do not always breed good deeds” (p. 380).

      More generally, the credible threat of a “gradual greening of economic policies” (Sinn 2008, p. 360) causes markets to consume stocks of nonrenewable resources more rapidly. This phenomenon has received particular attention in the context of climate change economics and policies. Fossil fuels are responsible for the...

  6. II Technology, Innovation, and Substitutability

    • 4 The Green Paradox under Imperfect Substitutability between Clean and Dirty Fuels
      (pp. 59-86)
      Ngo Van Long

      The burning of fossil fuels generates emissions that harm the environment not only in the present but also in the future, since emissions add to a pollution stock that decays only very slowly. As has been pointed out by many authors, the first best policy measure is to impose at each point of time a tax on emissions that equals the capitalized value of the stream of marginal damages of emissions (e.g., see Hoel 2011a; van der Ploeg and Withagen 2012). When the first best measure cannot be implemented because of political constraints, there are a variety of policy measures...

    • 5 Fossil Fuels, Backstop Technologies, and Imperfect Substitution
      (pp. 87-120)
      Gerard van der Meijden

      Technical progress and backstop technologies are now generally considered to be the solution to the sustainability problem raised by the Club of Rome in their alarming report about the limits to growth on our finite planet (Meadows et al. 1972): the economic consequences of the finite availability of natural resources can be mitigated by increasing the productivity of these resources or by finding substitutes that can replace them. However, although this putativepanaceareleases the economy from the physical scarcity problem, it may also have adverse effects on sustainability by affecting environmental quality. In particular, the literature on the “green...

    • 6 Innovation and the Green Paradox
      (pp. 121-150)
      Ralph A. Winter

      A recent economics literature has joined the theory of exhaustible resources with the dynamics of global warming.¹ This theoretical literature shows that government policies directed at climate change can have perverse consequences. The anticipation of a future policy promoting clean energy canincreasecurrent emissions of carbon. The announcement of a future tax on carbon, for example, lowers the anticipated value of retaining fossil fuel reserves for sale in the future. This drop in the opportunity cost of selling reserves today reduces current fuel prices, which raises the consumption of fossil fuels and current carbon emissions. Thus the anticipation of...

    • 7 Resource Extraction and Backstop Technologies in General Equilibrium
      (pp. 151-170)
      Ngo Van Long and Frank Stähler

      In this chapter we study the impact of technological progress of a backstop technology in a general equilibrium model where owners of finite resource stocks adjust their extraction paths to maximize their wealth, and where the rate of interest is endogenously determined. Using this framework, we investigate the possibility of a green paradox outcome. The term “green paradox” was coined by Sinn (2008), and it refers to the possibility that due to an intertemporal supply response, any effect reducing resource uses in a static model might have the opposite effect in the dynamic model. This phenomenon of adverse intertemporal adjustment...

  7. III Timing, Announcement Effects, and Time Consistency

    • 8 Does a Future Rise in Carbon Taxes Harm the Climate?
      (pp. 173-210)
      Florian Habermacher and Gebhard Kirchgässner

      In his seminal contribution Pearce (1991) discussed the advantages of a carbon tax as an efficient policy instrument to reduce carbon dioxide emissions. He considered only the demand side, implicitly assuming a fixed, exogenous energy supply.

      Today a large fraction of climate economics research still exhibits the same limitation, reducing the supply side of the energy market to a static process. However, at least since the contribution of Sinn (2008), there is a growing awareness that supply-side effects can be crucial in assessing carbon emission reduction strategies. According to the claim that Sinn entitled “green paradox,” a realistic carbon tax,...

    • 9 The Impacts of Announcing and Delaying Green Policies
      (pp. 211-224)
      Darko Jus and Volker Meier

      The green paradox can be interpreted as a story about the announcement effects of “green” policies, and in particular, taxes on the extraction or the use of fossil resources. In a static setting, introducing a specific consumption tax or employing some similar measure always reduces equilibrium output. This conventional wisdom turns out to be misleading if applied to a dynamic framework. When it comes to extracting a nonrenewable resource, timing issues are of crucial importance. The distinctive element of a problem involving a nonrenewable resource is that the action at one point in time affects the set of possible actions...

    • 10 Going Full Circle: Demand-Side Constraints to the Green Paradox
      (pp. 225-252)
      Corrado Di Maria, Ian Lange and Edwin van der Werf

      Hans-Werner Sinn coined the term “green paradox” to indicate the possibility that climate policies, such as carbon taxation and subsidies to renewable sources of energy, might induce resource owners to increase fossil fuel supplies in the short run, and hence increase current greenhouse gas emissions and climate damages (Sinn 2008).

      Sinn’s argument is that current emission reduction policies share a common focus on the demand side, while ignoring behavioral responses on the part of fossil fuels suppliers. This demand-side focus, which—according to Sinn—is common among policy makers, may prove counterproductive if policies are not at the same time...

  8. IV Empirics and Quantification

    • 11 Quantifying Intertemporal Emissions Leakage
      (pp. 255-286)
      Carolyn Fischer and Stephen Salant

      Reducing emissions of the greenhouse gases (GHGs) that contribute to global climate change is the greatest collective action problem of our time. According to the Intergovernmental Panel on Climate Change (IPCC), avoiding the largest risks of climate change will require that global emissions of carbon dioxide (CO₂) stop rising within the next two decades (IPCC 2007). At the same time, however, the current United Nations Framework Convention on Climate Change, under the principle of “common but differentiated responsibilities,” requires no mandatory action on the part of developing countries, including major emerging economies that are large emitters. Furthermore, in the absence...

  9. Contributors
    (pp. 287-288)
  10. Index
    (pp. 289-296)