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When do increasing carbon taxes accelerate global warming? A note on the green paradox

  • Edenhofer, Ottmar
  • Kalkuhl, Matthias

The "green paradox" by Hans-Werner Sinn suggests that increasing resource taxes accelerate global warming because resource owners increase near-term extraction in fear of higher future taxation. In this note we show that this effect does only occur for the specific set of carbon taxes that increase at a rate higher than the effective discount rate of the resource owners. We calculate a critical initial value for the carbon tax that leads to a decreased cumulative consumption over the entire (infinite) time horizon. Applying our formal findings to carbon taxes for several mitigation targets, we conclude that there is a low risk of a green paradox in case the regulator implements and commits to a permanently mal-adjusted tax. This remaining risk can be avoided by emissions trading scheme as suggested by Sinn--as long as the emission caps are set appropriately and the intertemporal permit market works correctly.

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File URL: http://www.sciencedirect.com/science/article/B6V2W-523TD38-1/2/2321fbd795a6c76ac2fce2353fa5adf1
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Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 39 (2011)
Issue (Month): 4 (April)
Pages: 2208-2212

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Handle: RePEc:eee:enepol:v:39:y:2011:i:4:p:2208-2212
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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  1. Frederick Van der Ploeg & Cees A. Withagen, 2010. "Is There Really a Green Paradox?," CESifo Working Paper Series 2963, CESifo Group Munich.
  2. Nicholas Stern, 2008. "The Economics of Climate Change," American Economic Review, American Economic Association, vol. 98(2), pages 1-37, May.
  3. Reyer Gerlagh, 2010. "Too Much Oil," Working Papers 2010.14, Fondazione Eni Enrico Mattei.
  4. Matthias Kalkuhl & Ottmar Edenhofer, 2010. "Prices vs. Quantities and the Intertemporal Dynamics of the Climate Rent," CESifo Working Paper Series 3044, CESifo Group Munich.
  5. Adelman, M. A., 1986. "Oil producing countries' discount rates," Resources and Energy, Elsevier, vol. 8(4), pages 309-329, December.
  6. Geoffrey Heal, 2009. "Climate Economics: A Meta-Review and Some Suggestions for Future Research," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 4-21, Winter.
  7. Hoel, Michael, 2011. "Is there a green paradox?," Memorandum 13/2010, Oslo University, Department of Economics.
  8. Sinn, Hans-Werner, 2008. "Public policies against global warming: A supply side approach," Munich Reprints in Economics 19638, University of Munich, Department of Economics.
  9. R. Quentin Grafton & Tom Kompas & Ngo Van Long, 2010. "Biofuels Subsidies and the Green Paradox," CESifo Working Paper Series 2960, CESifo Group Munich.
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