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When do increasing carbon taxes accelerate global warming? A note on the green paradox

Ottmar Edenhofer and Matthias Kalkuhl

Energy Policy, 2011, vol. 39, issue 4, 2208-2212

Abstract: The "green paradox" by Hans-Werner Sinn suggests that increasing resource taxes accelerate global warming because resource owners increase near-term extraction in fear of higher future taxation. In this note we show that this effect does only occur for the specific set of carbon taxes that increase at a rate higher than the effective discount rate of the resource owners. We calculate a critical initial value for the carbon tax that leads to a decreased cumulative consumption over the entire (infinite) time horizon. Applying our formal findings to carbon taxes for several mitigation targets, we conclude that there is a low risk of a green paradox in case the regulator implements and commits to a permanently mal-adjusted tax. This remaining risk can be avoided by emissions trading scheme as suggested by Sinn--as long as the emission caps are set appropriately and the intertemporal permit market works correctly.

Keywords: Climate; policy; Resource; taxes; Supply-side; dynamics (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:eee:enepol:v:39:y:2011:i:4:p:2208-2212