International Capital Markets, Oil Producers and the Green Paradox

31 Pages Posted: 7 Oct 2014

See all articles by Gerard van der Meijden

Gerard van der Meijden

Vrije Universiteit Amsterdam, School of Business and Economics

Rick van der Ploeg

University of Oxford

Cees Withagen

Free University of Amsterdam; Tilburg University

Date Written: September 29, 2014

Abstract

A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given.

Keywords: global warming, Green Paradox, Hotelling rule, oil importers, oil producers, investment, capital markets, carbon tax, exploration investment, general equilibrium

JEL Classification: D90, H20, Q31, Q38

Suggested Citation

van der Meijden, Gerard and van der Ploeg, Frederick and Withagen, Cees A. M., International Capital Markets, Oil Producers and the Green Paradox (September 29, 2014). CESifo Working Paper Series No. 4981. Available at SSRN: https://ssrn.com/abstract=2506590

Gerard Van der Meijden (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Frederick Van der Ploeg

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Cees A. M. Withagen

Free University of Amsterdam ( email )

Tinbergen Institute De Boelelaan 1105
1081 HV Amsterdam
Netherlands

Tilburg University ( email )

Postbus 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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