Brown Backstops Versus the Green Paradox
Anticipated climate policies are ineffective when fossil fuel owners respond by shifting supply intertemporally (the green paradox). This mechanism relies crucially on the exhaustibility of fossil fuels. We analyze the effect of anticipated climate policies on emissions in a simple model with two fossil fuels: one scarce and dirty (eg oil), the other abundant and dirtier (eg coal). We derive conditions for a 'green orthodox': anticipated climate policies may reduce current emissions. Calibrations suggest that intertemporal carbon leakage (from -22% to 13%) is a relatively minor concern.
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