Simultaneous Supplies of Dirty Energy and Capacity Constrained Clean Energy: Is There a Green Paradox?

Marc Gronwald (), Ngo Long and Luise Roepke ()
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Marc Gronwald: University of Aberdeen Business School
Luise Roepke: ifo Institute for Economic Research
Authors registered in the RePEc Author Service: Luise Röpke

Environmental & Resource Economics, 2017, vol. 68, issue 1, No 3, 47-64

Abstract: Abstract The effects of two popular second-best clean energy policies are analysed using an extended Hotelling-type resource extraction framework. This model features, first, heterogenous energy sources and, second, a capacity-constrained backstop technology. This setup allows for capturing the following two empirical observations. First, different types of energy sources are used simultaneously despite different production cost. Second, experiences from various European countries show that a further expansion of the use of climate friendly technologies faces substantial technological as well as political constraints. We use this framework to analyse if under two policy scenarios a so-called “Green Paradox” occurs. A subsidy for the clean energy as well as an expansion of the capacity of the clean energy are considered. The analysis shows that under plausible parameter values both policy measures lead to a weak Green Paradox; however a strong Green Paradox is only found for the capacity expansion scenario. In addition, the subsidy is found to be welfare enhancing while the capacity increase is welfare enhancing only if the cost of adding the capacity is sufficiently small.We also show the effects of the policies crucially depend on the initial capacity and that under certain scenarios even an “extreme” Green Paradox is found.

Keywords: Capacity constraints; Green Paradox; Climate change; Simultaneous resource use; Cost reversal (search for similar items in EconPapers)
JEL-codes: H23 Q38 Q54 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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Working Paper: Simultaneous Supplies of Dirty Energy and Capacity Constrained Clean Energy: Is there a Green Paradox? (2016)
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DOI: 10.1007/s10640-017-0151-6

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