Green Paradoxes are defined as the phenomenon that climate change policies can have counterproductive effects. For example, a subsidy on clean energy from renewable resources (solar, wind) will decrease the price at which this energy is supplied. But if the price still exceeds the cost of fossil fuel extraction and given that available stocks will be depleted, the price decrease will speed up the extraction from nonrenewable resources, such as oil, that cause CO2 emissions. Hence, instead of delaying extraction the policy enhances initial extraction and emissions. In the design of environmental policy this effect is insufficiently taken into account, because the supply side of the market for fossil fuels is largely neglected.
The principal aim of this research proposal is to critically investigate Green Paradoxes and to come up with sound policy recommendations, taking into account the demand as well as the supply dimension of fossil fuels. Particular attention is paid to a broad and dynamic welfare analysis, allowing for concerns regarding sustainability. Especially relevant for tackling the research question is to provide a closer examination of imperfect competition on the oil market, to distinguish between dirty and clean alternatives for fossil fuel, and to include capital accumulation. The success of combating global warming stands or falls with facing up to the political and harsh economic realities, both national and global. Little to no research has been done on this, hence the proposal is to study the political economy of climate change policy to come up with proposals that not only muster global support but also address the adverse distributional aspects of climate change itself on developing economies and on the poorest of advanced economies who get hardest hit by green taxes. This requires not only the tools of modern political economy, but also the realms of second-best economics and the latest developments in public finance. For the project to be successful we will integrate environmental and resource economics on the one hand and public finance, international economics, development economics and macroeconomics on the other. We will also employ a large variety of the most advanced methodologies available, including dynamic optimisation and differential games. The research is rooted in economic theory, with the ultimate aim to arrive at analytical results. Given the complexity of the problem, related to the fact that we are concerned with a dynamic perspective, numerical methods will be invoked, after calibration to real world data.
The core of our research proposal is thus both the optimal and the politically feasible design of environmental policies with regard to fossil and alternative backstop fuels and technologies to combat (the negative effects) climate change in face of the many economic distortions and other challenges facing governments and the political realities across the globe, both at home and in other countries.
SPONSOR
This research is financed by the European Research Council ERC Advanced Grant.
PROJECT START AND END DATE
The project runs from 01-05-2011 to 01-05-2016.