The Green Paradox The Green Paradox Reyer Gerlagh Tilburg University
Introduction Policy questions Policy questions � What is optimal climate change policy? Should we tax carbon dioxide emissions? � Now / in the future / ramping up carbon taxes? Now / in the future / ramping up carbon taxes? � � Should we develop clean energy alternatives for oil / coal / gas? � � Main insight: Fossil fuels markets are dynamically integrated Fossil fuels markets are dynamically integrated � � Expected policies at future time t affect current market (!) � Future carbon taxes can backfire if they increase current emissions � If we cannot set optimal pollution constraints, we must worry about effect of � policy on abundant polluting resource extraction: coal and unconventional oil Reyer Gerlagh 04 July 2011 2
1992-1997 Discovery of Climate Change – Oil connection Discovery of Climate Change Oil connection � Oil crisis: Maedows et al 1972; Solow/Stiglitz/Dasgupta/Heal 1974 � Climate change: Earth Summit Rio de Janeiro 1992 � High does nothing and rising is worse: carbon taxes should keep d declining to cut harmful emissions (Sinclair 1992) li i t t h f l i i (Si l i 1992) � On the optimum trend of fossil fuel taxation (Sinclair 1994) � The optimal time path of a carbon tax (Ulph and Ulph 1994) Th i l i h f b (Ul h d Ul h 1994) � Depletion of fossil fuels and the impact of global warming (Hoel and Kverndokk 1996) d K d kk 1996) � Fossil fuels, stock externalities, and backstop technology (Tahvonen 1997) (Tahvonen 1997) Reyer Gerlagh 04 July 2011 3
1997-2008 Silence? (‘more important’ questions) Silence? ( more important questions) � Shift in attention, from optimal climate change policy connected to exhaustible resources considerations, to distributional question: who pays who gains: (1) timing of optimal policy (discounting) & who pays, who gains: (1) timing of optimal policy (discounting) & (2) international cooperation � Act or delay climate change policy? Should we discount future Act or delay climate change policy? Should we discount future damages? They will only happen after 2100, so why worry? Nordhaus WD (1993), Rolling the DICE: an optimal transition path for � controlling greenhouse gases, Resource and Energy Economics 15: 27-50. � We will not be able to cooperate internationally! Barret, S. (1994), Self-enforcing international environmental agreements, � Oxford Economic Papers 46: 878-894. Reyer Gerlagh 04 July 2011 4
2008 The oil market matters: The Green Paradox The oil market matters: The Green Paradox � Public policies against global warming: a supply side approach (Sinn 2008) � Technology treaties and fossil-fuels extraction (Strand 2008) T h l t ti d f il f l t ti (St d 2008) � Bush meets Hotelling: effects of improved renewable energy technology on greenhouse gas emissions (Hoel 2008) technology on greenhouse gas emissions (Hoel 2008) � Strategic Resource Dependence (Gerlagh and Liski 2011) Reyer Gerlagh 04 July 2011 5
2010-now The Green Paradox, revised The Green Paradox revised � Too much oil (Gerlagh 2009/2011) � Biofuel subsidies and the green paradox (Grafton, Kompas, van L Long 2010) 2010) � Is there really a green paradox? (van der Ploeg and Withagen 2010) 2010) � Climate change and carbon tax expectations (Hoel 2010) � Climate change and carbon tax expectations (Hoel 2010) � The Supply Side of CO2 with Country Heterogeneity (Hoel 2011) � Cutting costs of catching carbon … (Hoel and Jensen 2010) C tti t f t hi b (H l d J 2010) � Can Brown Backstops undo the GP (Michielsen 2011) Reyer Gerlagh 04 July 2011 6
Introduction Overview Overview � Aim: connect climate policy questions to resource economics models � Gradually build model (add elements) G d ll b ild d l ( dd l t ) � Open research questions Reyer Gerlagh 04 July 2011 7
Model I: Sinclair (1992,1994) Fossil fuels & climate change Fossil fuels & climate change � High does nothing and rising is worse: carbon taxes should keep declining to cut harmful emissions (Manchester School 60:41-52) � “The key decision of those lucky enough to own oil-wells is not so “Th k d i i f th l k h t il ll i t much how much to produce as when to extract it.” (1992) � � “Fossil fields are a stock Coal or oil burnt at one date means that Fossil fields are a stock. Coal or oil burnt at one date means that there is less to burn later” (1994) � Rising carbon taxes mean lower future profits for fossil fuel � Rising carbon taxes, mean lower future profits for fossil fuel owners, and dynamic arbitrage implies they accept lower present prices (at higher supply) p ( g pp y) Reyer Gerlagh 04 July 2011 8
Model I: Sinclair (1992,1994) Reduced Model Set Up Reduced Model Set Up � Sinclair has fully closed model (Cobb-Doublas production with utility max) with endogenous interest rate I think that’s insubstantial Main intuition is simple / partial I think that s insubstantial. Main intuition is simple / partial � � − σ = = at � Demand: ( ) Q t A t D P t ( ) ( ( )) e P t ( ) c c � ( ) ∞ = − = ∫ 0 � Supply: S t E t ( ) S (0) E t dt ( ) = � Resource price inclusive tax: R i i l i t P t P t ( ) ( ) P t Z t P t Z t ( ) ( ) ( ) ( ) c ≡ � z t ( ) ( ) Z t ( ) ( ) / ( ) Z t ( ) � Dynamic Fossil Fuel Policy: y y � = + � Hotelling rule (dynamic arbitrage): P t ( ) / P t ( ) r z c c Reyer Gerlagh 04 July 2011 9
Model I: Sinclair (1992,1994) Iso-elastic demand Iso elastic demand + e σ − + = ⇔ = ( ( z r t ) ) at ( ( z r t ) ) � Substitution: P t ( ) P (0) e E t ( ) e E (0) c c ∞ − σ + − σ = at ( ( z r t ) ) � Total stock: � Total stock: ∫ ∫ S S (0) (0) E E (0) (0) e e e e dt dt 0 E (0) ∞ − σ + = = = = { a ( r z )} t ∫ ∫ E E (0) (0) e e dt dt σ + − 0 ( r z ) a � Present emissions increase with increasing taxes: = σ + − E ( ) (0) { ( { ( z r ) ) a S } (0) } ( ) � Can we do ‘better’ = more general? Reyer Gerlagh 04 July 2011 10
Model I: Sinclair (1992,1994) General demand General demand � Assume competitive market = Hotelling rule: Stock = cumulative supply = cumulative demand ∞ ∞ + + Δ < Δ < Δ < = Δ = ∫ ( ( r z t r z t ) ) ∫ 0; 0; 0 S ( ( P Z z , , ) ) D e ( ( Z P dt ) ) P Z z 0 0 0 0 0 0 0 0 � Change in future tax ( z ), must be offset by change in initial price Ch i f t t ( ) t b ff t b h i i iti l i − Δ dP P = = Δ = Δ + Δ ⇒ = < 0 0 dS d dP dz 0 0 0 0 P P 0 0 z z Δ Δ 0 d dz z � Future higher carbon tax ( d z >0 ) implies lower current price ( d P 0 <0 ) implies higher current emissions ( d E implies higher current emissions ( d E 0 >0 ). 0 ) Reyer Gerlagh 04 July 2011 11
Model I: Sinclair (1992,1994) Policy implications Policy implications � Sinclair emphasizes that to study climate change requires closed economy, as climate change causes major damages. Otherwise his analysis would resemble too much Dasgupta & Heal (1979) Otherwise, his analysis would resemble too much Dasgupta & Heal (1979) � � but his analysis is unclear (who understands 1992, eq (2)+(7)?) � � Moreover I wonder whether closed economy + strong unrealistic Moreover, I wonder whether closed economy + strong unrealistic assumption on damages is better then partial economy � Main climate change damages after 2100, main fossil fuel use a c a e c a ge da ages a e 00, a oss ue use before 2100 → separation? � Conclusion stands: “High does nothing and rising is worse: carbon g g g taxes should keep declining to cut harmful emissions” [discuss] Declining refers to ad valorem tax as price factor, per volume tax � can increase i Reyer Gerlagh 04 July 2011 12
Model II: Ulph and Ulph (1994) Efficient carbon tax = NPV marginal damage Efficient carbon tax = NPV marginal damage � Fundamental principle: Optimal carbon tax = Pigouvian tax = NPV marginal damage � As CO2 levels increase, and damages are convex, marginal A CO2 l l i d d i l damages are increasing in CO2 → marginal damages increasing over time over time � Sinclair (1992) cannot be correct. Sinclair assumes ( Z 0 , z ) policy, optimal policy must be more complicated op a po cy us be o e co p ca ed � Use partial analysis (utility of resource use), no closed economy � Use linear demand and marginal damages to solve explicitly Use linear demand and marginal damages to solve explicitly Reyer Gerlagh 04 July 2011 13
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