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Fossil Fuel Extraction and Climate Policy: A Review of the Green Paradox with Endogenous Resource Exploration

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  • Ines Österle

    (Centro di Economia Regionale, dei Trasporti e del Turismo CERTeT - Bocconi)

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    Abstract

    Policies aimed at reducing emissions from fossil fuels may increase climate damages. This “Green Paradox” emerges if resource owners increase near-term extraction in fear of stricter future policy measures. Hans-Werner Sinn (2008) showed that the paradox occurs when increasing resource taxes are applied within a basic exhaustible resource model. This article highlights that the emergence of the Green Paradox within this framework relies on the non-existence of a backstop technology and fixed fossil fuel resources. In doing this, it initially presents a basic exhaustible resource model which includes a backstop technology and shows that the implementation of a specific sales tax path is effective in mitigating global warming. Secondly, it considers the case of costly exploration activities being introduced within the basic model and accounts for the real world condition that the location of fossil fuels is unknown. Under this condition, an increasing cash flow tax is effective in dealing with climate change if policy makers commit to a high initial tax level and to a specific range of growth rates.

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    Bibliographic Info

    Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2012.13.

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    Date of creation: Mar 2012
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    Handle: RePEc:fem:femwpa:2012.13

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    Related research

    Keywords: Green Paradox; Supply-side dynamics; Climate Policy; Exhaustible Resources; Fossil Fuels; Exploration;

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    1. Deacon Robert T., 1993. "Taxation, Depletion, and Welfare: A Simulation Study of the U.S. Petroleum Resource," Journal of Environmental Economics and Management, Elsevier, vol. 24(2), pages 159-187, March.
    2. Edwin van der Werf & Corrado Di Maria, 2011. "Unintended Detrimental Effects of Environmental Policy: The Green Paradox and Beyond," CESifo Working Paper Series 3466, CESifo Group Munich.
    3. Frederick van der Ploeg & Cees Withagen, 2011. "Optimal Carbon Tax with a Dirty Backstop - Oil, Coal, or Renewables?," CESifo Working Paper Series 3334, CESifo Group Munich.
    4. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
    5. Sinn, Hans-Werner, 2008. "Public policies against global warming: A supply side approach," Munich Reprints in Economics 19638, University of Munich, Department of Economics.
    6. Corrado Di Maria & Sjak Smulders & Edwin van der Werf, 2008. "Absolute Abundance and Relative Scarcity: Announced Policy, Resource Extraction, and Carbon Emissions," Working Papers 2008.92, Fondazione Eni Enrico Mattei.
    7. Livernois, John R., 1987. "Empirical evidence on the characteristics of extractive technologies: The case of oil," Journal of Environmental Economics and Management, Elsevier, vol. 14(1), pages 72-86, March.
    8. Livernois, John R & Uhler, Russell S, 1987. "Extraction Costs and the Economics of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 195-203, February.
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