With the end of this world not very far, climate change is one global issue gaining more and more momentum as the days go by. Whether in the political space or amongst the economists, it has become a source of both importance and contention as global CO2 emissions reach sky-rocketing levels, disturbing the ecosystem and destabilising everything else coming in its way. In such a situation, the one simple solution which takes the form of a concrete thought in everyone’s mind is effective policymaking. Emission trade caps, carbon taxes, emission standards, among others are some examples; however, such is our fate, that even “good” policy changes could be doing more harm than good to Earth. How is this possible? Why would a policy change lead to more damages than before? Since this is a complex and paradoxical concept, it’s known as the Green Paradox.
In simple words, the Green Paradox refers to the phenomenon wherein policy decisions such as imposition of carbon taxes could be leading to more emissions than what they aim to reduce in the future. The inception of this paradox took place in 2003, when economist Hans-Werner Sinn in his controversial book by the same name talked about how countries following the Kyoto protocol are contributing to even more worrisome environmental damages.
Unlike most concepts, this paradox places more emphasis on the supply-side economics of fossil resource owners rather than the demand side. When a carbon tax, more famously known as the Pigovian tax, is placed on a non-renewable resource, it increases the price of the same by the amount of societal damage done to the environment.
As a result, the consumer demand falls, which leads prices received by suppliers to fall. Therefore, when such a policy is announced for future, the suppliers start extracting more and more of that resource in the present day to maintain that same level of profitability.
In other words, the proponents of this model claim that all the taxation really does is create “before-tax” and “after-tax” divisions in the time horizon for the suppliers and induces them to move the extraction forward in time.
The theory that resource owners extract only when it’s profitable to do so and wouldn’t make investments anywhere else was propounded by Harold Hotelling in 1931; thus also known as the Hotelling Rule. So, the extraction which would have taken place in future had these taxes not been announced simply takes place ahead of time.
Since the prices of non-renewable resources are representative of their extraction costs as well, the suppliers make maximum profits by simply deciding when to extract. This leads to even more damages and hence, ends up worsening the situation by manifold.
The possibility that these policies could backfire to this degree is difficult to take in and hence has become a serious topic for debate amongst environmental economists. Deplete of any concrete evidences, the Green Paradox is often labelled as faulty.
Since its inception in 2003, so far only 2 empirical evidences exist- in 2013, coal suppliers didn’t budge before the US Acid Rain Program which aimed to impact SO2 emissions severally; the second event took place in the same year when coal and natural gas prices shot up after the cap-and-trade emission failed.
Both these occurrences are however not very indicative of whether the Green Paradox is real or not.
One of the biggest loopholes in this theory is the lack of relevance in its assumptions. The Green Paradox doesn’t take into account the planning, development and exploration activities that are undertaken when an extraction is decided upon-these postpone the actual extraction by many years.
Since these also lead to exorbitant costs, the suppliers may after all not carry out the extraction due to less profits. A backstop technology is one that lends perfect substitutability to non-renewable resources. Thus, by assuming that there aren’t any other viable alternatives i.e., backstop technology, the theory exaggerates the consequences considerably.
The reason why the biggest impact of climate change policies is on the time of the extraction is because the theory assumes all extraction costs to be constant over time and every unit of the fossil fuel being profitable.
Spatial carbon leakage, also known as the spacing of emissions among different countries through re-allocation of production when some countries undertake to reduce emissions, is also not taken into consideration while talking about the green paradox model.
Despite these discrepancies, the Green Paradox must not be misunderstood as a lethargic attempt at criticising the existing environmental policies. The intent is simply to expand the current literature which exists in this space.
For instance, this concept provides a new perspective by emphasising the importance of supply-side of the market. We must make extracting non-renewable resources unprofitable to truly curb the pollution levels and to do that, we need newer perspectives and initiatives on the policy tables.
Unbeknownst to us, we might be experiencing a Green Paradox right now. In such a case, only one question comes to mind: is it too late to prevent it from happening?