The Green Paradox, A Hotelling Cul de Sac

Robert D. Cairns and James L. Smith
Authors registered in the RePEc Author Service: James L. Smith

Economics of Energy & Environmental Policy, 2019, vol. Volume 8, issue Number 2

Abstract: The green paradox is an effect by which an increasing tax per unit on oil production, aimed at tracking damages from CO2 emissions, induces an increase in world production and a decrease in price in the near term. The increase is a rational response in a Hotelling exhaustible-resource model. We simulate the decisions of a price-taking producer in response to a tax of various shapes. In contrast to a Hotelling model, our extraction technology involves irreversible, lumpy investments in exploration and development. In addition, we assume output from a developed reserve is subject to natural decline at a rate that is determined by the sunk development investment and the geology of the reserve. Decisions are far more complicated, and results far subtler, than in the Hotelling framework. Given a price path, we show that almost any form of tax causes a reduction in the level of development and initial production, thereby contradicting the hypothesis of the green paradox.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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