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http://ssrn.com/abstract=1562463
 
 

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Is There Really a Green Paradox?


Rick Van der Ploeg


University of Oxford

Cees Withagen


Free University of Amsterdam; Tilburg University

February 2010

CESifo Working Paper Series No. 2963

Abstract:     
The Green Paradox states that, in the absence of a tax on CO2 emissions, subsidizing a renewable backstop such as solar or wind energy brings forward the date at which fossil fuels become exhausted and consequently global warming is aggravated. We shed light on this issue by solving a model of depletion of non-renewable fossil fuels followed by a switch to a renewable backstop, paying attention to timing of the switch and the amount of fossil fuels remaining unexploited. We show that the Green Paradox occurs for relatively expensive but clean backstops (such as solar or wind), but does not occur if the backstop is sufficiently cheap relative to marginal global warming damages (e.g., nuclear energy) as then it is attractive to leave fossil fuels unexploited and thus limit CO2 emissions. We show that, without a CO2 tax, subsidizing the backstop might enhance welfare. If the backstop is relatively dirty and cheap (e.g., coal), there might be a period with simultaneous use of the non-renewable and renewable fuels. If the backstop is very dirty compared to oil or gas (e.g., tar sands), there is no simultaneous use. The optimum policy requires an initially rising CO2 tax followed by a gradually declining CO2 tax once the dirty backstop has been introduced. We also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist.

Number of Pages in PDF File: 38

Keywords: Green Paradox, Hotelling rule, non-renewable resource, renewable backstop, global warming, carbon tax, limit pricing

JEL Classification: Q30, Q42, Q54

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Date posted: March 23, 2010  

Suggested Citation

van der Ploeg, Rick and Withagen, Cees, Is There Really a Green Paradox? (February 2010). CESifo Working Paper Series No. 2963. Available at SSRN: http://ssrn.com/abstract=1562463

Contact Information

Frederick Van der Ploeg
University of Oxford ( email )
Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
Cees A. M. Withagen (Contact Author)
Free University of Amsterdam ( email )
Tinbergen Institute De Boelelaan 1105
1081 HV Amsterdam
Netherlands
Tilburg University ( email )
Postbus 90153
Tilburg, DC 5000 LE
Netherlands
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