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International Capital Markets, Oil Producers and the Green Paradox

  • Rick Van der Ploeg
  • Gerard van der Meijden
  • Cees Withagen

In partial equilibrium a rapidly rising carbon tax encourages oil producers to extract fossil fuels more quickly, giving rise to the Green Paradox. General equilibrium analysis for a closed economy shows that a rapidly rising carbon tax negatively affects the interest rate, which tends to weaken the Green Paradox. However, in a two-country world with an oil-importing and an oil-exporting region the Green Paradox may be amplified in general equilibrium if exporters are relatively patient. On the contrary, if oil exporters are relatively impatient, the Green Paradox might be reversed. Furthermore, general equilibrium effects tend to weaken the link between a capital asset tax and the time profile of resource extraction so that the capital asset tax becomes less useful as an instrument to offset the Green Paradox effect associated with the announcement of a future carbon tax. Taking exploration costs into account, we show that the effect of both policy instruments on cumulative extraction is of opposite sign as the effect on current extraction. Moreover, if the change in current extraction is amplified or reversed in general equilibrium, so will be the change in cumulative extraction.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number OxCarre Research Paper 130.

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Date of creation: 31 Jan 2014
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Handle: RePEc:oxf:wpaper:oxcarre-research-paper-130
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  1. Thomas Eichner & Rüdiger Pethig, 2009. "Carbon Leakage, the Green Paradox and Perfect Future Markets," CESifo Working Paper Series 2542, CESifo Group Munich.
  2. Eichner, Thomas & Pethig, Ru¨diger, 2013. "Flattening the carbon extraction path in unilateral cost-effective action," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 185-201.
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  4. Spiro, Daniel, 2014. "Resource prices and planning horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 159-175.
  5. Daniel Nachtigall & Dirk Rübbelke, 2014. "The Green Paradox and Learning-by-Doing in the Renewable Energy Sector," CESifo Working Paper Series 4880, CESifo Group Munich.
  6. Mikhail Golosov & John Hassler & Per Krusell & Aleh Tsyvinski, 2011. "Optimal Taxes on Fossil Fuel in General Equilibrium," NBER Working Papers 17348, National Bureau of Economic Research, Inc.
  7. Hendrik Ritter & Mark Schopf, 2013. "Unilateral Climate Policy: Harmful or even Disastrous?," Working Papers CIE 62, University of Paderborn, CIE Center for International Economics.
  8. Rick Van der Ploeg & Armon Rezai, 2013. "Abandoning Fossil Fuel: How fast and how much?," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.
  9. Michielsen, Thomas O., 2014. "Brown backstops versus the green paradox," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 87-110.
  10. Nancy Peregrim Marion & Lars E.O. Svensson, 1983. "World Equilibrium with Oil Price Increases: An Intertemporal Analysis," NBER Working Papers 1074, National Bureau of Economic Research, Inc.
  11. Mark Schopf & Hendrik Ritter, 2012. "Reassessing the Green Paradox," FEMM Working Papers 120013, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  12. Reyer Gerlagh, 2011. "Too Much Oil," CESifo Economic Studies, CESifo, vol. 57(1), pages 79-102, March.
  13. Hart, Rob & Spiro, Daniel, 2011. "The elephant in Hotelling's room," Energy Policy, Elsevier, vol. 39(12), pages 7834-7838.
  14. Nordhaus, William D & Yang, Zili, 1996. "A Regional Dynamic General-Equilibrium Model of Alternative Climate-Change Strategies," American Economic Review, American Economic Association, vol. 86(4), pages 741-65, September.
  15. Hans-Werner Sinn, 2008. "Public policies against global warming: a supply side approach," International Tax and Public Finance, Springer, vol. 15(4), pages 360-394, August.
  16. Frederick van der Ploeg & Cees Withagen, 2011. "Too Much Coal, Too Little Oil," OxCarre Working Papers 056, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
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