Effective Climate Policy Needs Non-Combustion Uses for Hydrocarbons

20 Pages Posted: 21 Jun 2021

See all articles by Kai A. Konrad

Kai A. Konrad

Max Planck Institute for Tax Law and Public Finance; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); IZA Institute of Labor Economics

Kjell Erik Lommerud

University of Bergen

Multiple version iconThere are 2 versions of this paper

Date Written: June 21, 2021

Abstract

A central issue that is discussed in climate policy is the fear of owners of stocks of fossil hydrocarbon deposits that high CO2 taxes and bans on the combustion use of hydrocarbons will turn their stocks into stranded assets. They might react by extracting and selling their reserves today: a rush to burn results. We show how the stranded-asset problem could be avoided or strongly moderated. We analyze a simple intertemporal equilibrium with a given stock of fossil hydrocarbons. In this framework the following properties hold: For a climate-neutral solution to the rush-to-burn problem it is important to maintain existing and generate new markets for climate-neutral products from fossil hydrocarbons in the future. We give examples for such products. Subsidies for such products (or for their innovation) reduce the rush-to-burn problem. In contrast, the creation of substitutes for fossil hydrocarbon-based climate-neutral products, or subsidies for such products reduce the market for products made from fossil hydrocarbons. This can aggravate the stranded-assets problem and thus can have a climate-damaging effect.

Keywords: green paradox, rush to burn, catalytic pyrolysis, hydrocarbons, plastics

JEL Classification: Q54, Q35

Suggested Citation

Konrad, Kai A. and Lommerud, Kjell Erik, Effective Climate Policy Needs Non-Combustion Uses for Hydrocarbons (June 21, 2021). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2021-09, Available at SSRN: https://ssrn.com/abstract=3871017 or http://dx.doi.org/10.2139/ssrn.3871017

Kai A. Konrad (Contact Author)

Max Planck Institute for Tax Law and Public Finance ( email )

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Munich, 80539
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/home.cfm

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, 81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, 53072
Germany

Kjell Erik Lommerud

University of Bergen ( email )

Mus├ęplassen 1
N-5008 Bergen, +47 55 58
Norway

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