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The Green Paradox, A Hotelling Cul de Sac

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  • Robert D. Cairns and James L. Smith

Abstract

The green paradox is an effect by which an increasing tax per unit on oil production, aimed at tracking damages from CO2 emissions, induces an increase in world production and a decrease in price in the near term. The increase is a rational response in a Hotelling exhaustible-resource model. We simulate the decisions of a price-taking producer in response to a tax of various shapes. In contrast to a Hotelling model, our extraction technology involves irreversible, lumpy investments in exploration and development. In addition, we assume output from a developed reserve is subject to natural decline at a rate that is determined by the sunk development investment and the geology of the reserve. Decisions are far more complicated, and results far subtler, than in the Hotelling framework. Given a price path, we show that almost any form of tax causes a reduction in the level of development and initial production, thereby contradicting the hypothesis of the green paradox.

Suggested Citation

  • Robert D. Cairns and James L. Smith, 2019. "The Green Paradox, A Hotelling Cul de Sac," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:eeepjl:eeep8_2_cairns
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    Cited by:

    1. Prest, Brian C. & Fell, Harrison & Gordon, Deborah & Conway, TJ, 2023. "Estimating the Emissions Reductions from Supply-side Fossil Fuel Interventions," RFF Working Paper Series 23-11, Resources for the Future.
    2. Prest, Brian C., 2020. "Supply-Side Reforms to Oil and Gas Production on Federal Lands: Modeling the Implications for Climate Emissions, Revenues, and Production Shifts," RFF Working Paper Series 20-16, Resources for the Future.
    3. Durand-Lasserve, Olivier & Pierru, Axel, 2021. "Modeling world oil market questions: An economic perspective," Energy Policy, Elsevier, vol. 159(C).
    4. Hiorth, Aksel & Osmundsen, Petter, 2020. "Petroleum taxation. The effect on recovery rates," Energy Economics, Elsevier, vol. 87(C).

    More about this item

    JEL classification:

    • F0 - International Economics - - General

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