The Green Paradox and the importance of endogenous resource exploration

It has been proposed that climate policies aimed at reducing greenhouse gas emissions from fossil fuel use may actually worsen the problem of global warming. Such a Green Paradox could occur if fossil fuel resource owners exploit their resources more rapidly due to the expectation of stricter climate policies in the future. This article shows that the emergence of the Green Paradox is less plausible if exploration activities are taken into account. An extraction model that incorporates exploration investments finds that an increasing cash flow tax is effective in dealing with climate change depending upon the specific formulation of the tax scheme. For example, the higher the initial tax level, the more effective is the tax scheme in mitigating climate change and hence a Green Paradox can be avoided. A very low growth rate is also beneficial for the climate as it leads to a small temporal redistribution of extraction to earlier periods. A very high growth rate leads to faster extraction; however, it also coincides with a significant decrease in total emissions that is inconsistent with a Green Paradox.