The green paradox

Live simultaneous interpretation in French.

Abstract

Green Paradoxes occur if well-intended climate change policies have adverse effects. Prominent examples are subsidies on renewables leading to faster extraction of fossil fuels, or carbon taxes rising too quickly, having the same effect. Whether or not Green Paradoxes occur in reality and whether or not their effects are detrimental for welfare are much disputed issues.

In his lecture Cees Withagen will offer a survey of the theoretical findings, the controversies surrounding Green Paradoxes, and some of the empirics. Attention will be paid first of all to some basic insights regarding the supply of fossil fuels, the role of stock-dependent extractions costs therein, the cost of renewables and the rate of interest. Then he will discuss Green Paradoxes in the context of economic growth, development and poverty alleviation. He will also address the role of dirty backstops, such as coal or tar sands. So far, Green Paradoxes have been considered mainly on a high level of aggregation. It will be argued in this lecture that a multi-country setting is far more appropriate. In such a setting the rate of interest, which is a crucial variable, is an endogenous variable that needs to be determined in general equilibrium. This approach may lead to surprising new insights. Finally, market structure, in particular non-competitive supply of fossil fuels, will be discussed. Monopolistic fossil fuel supply will give rise to periods of time with limit pricing, meaning that the price renewables is undercut by the fossil fuel suppliers, thereby making investments in renewables less profitable than possibly originally expected. The empirical evidence on Green Paradoxes is limited. Withagen will end his talk with a plea for more work in this respect.