TY - JOUR

T1 - Is there really a green paradox?

AU - van der Ploeg, Frederick

AU - Withagen, Cees

PY - 2012/11

Y1 - 2012/11

N2 - In the absence of a CO2 tax, the anticipation of a cheaper renewable backstop increases current emissions of CO2. Since the date at which renewables are phased in is brought forward and more generally future emissions of CO2 will decrease, the effect on global warming is unclear. Green welfare falls if the backstop is relatively expensive and full exhaustion of fossil fuels is optimal, but may increase 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 more fossil fuels unexploited and thus limit CO2 emissions. We establish these results by analyzing 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 also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist. Finally, we show that if backstops are already used and more backstops become 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 fuel will occur in finite time and a backstop subsidy always curbs green welfare.

AB - In the absence of a CO2 tax, the anticipation of a cheaper renewable backstop increases current emissions of CO2. Since the date at which renewables are phased in is brought forward and more generally future emissions of CO2 will decrease, the effect on global warming is unclear. Green welfare falls if the backstop is relatively expensive and full exhaustion of fossil fuels is optimal, but may increase 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 more fossil fuels unexploited and thus limit CO2 emissions. We establish these results by analyzing 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 also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist. Finally, we show that if backstops are already used and more backstops become 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 fuel will occur in finite time and a backstop subsidy always curbs green welfare.

KW - Carbon tax

KW - Global warming

KW - Green Paradox

KW - Hotelling rule

KW - Limit pricing

KW - Monopoly

KW - Non-renewable resource

KW - Renewable backstop

KW - Simultaneous use

UR - http://www.scopus.com/inward/record.url?scp=84869878222&partnerID=8YFLogxK

U2 - 10.1016/j.jeem.2012.08.002

DO - 10.1016/j.jeem.2012.08.002

M3 - Article

AN - SCOPUS:84869878222

VL - 64

SP - 342

EP - 363

JO - Journal of Environmental Economics and Management

JF - Journal of Environmental Economics and Management

SN - 0095-0696

IS - 3

ER -