Thursday, March 25, 2010

The Green Paradox II - too much oil?

Today is "Green Paradox" day.

Following on from Rick Van der Ploeg comes a new paper from Reyer Gerlagh (Tilborg). Incidently, both presented papers at the University of Birmingham last year (although not these papers).

Both papers suggest the green paradox could be an illusion or more accurately not a paradox at all. As I rule I am a fan of paradoxes so it is a shame to see another one bite the dust.

Too Much Oil

Reyer Gerlagh
Tilburg University - Center and Faculty of Economics and Business Administration

February 25, 2010

FEEM Working Paper No. 14.2009

Fear for oil exhaustion and its consequences on economic growth has been a driver of a rich literature on exhaustible resources from the 1970s onwards. But our view on oil has remarkably changed and we now worry how we should constrain climate change damages associated with oil and other fossil fuel use. In this climate change debate, economists have pointed to a green paradox: when policy makers stimulate the development of non-carbon energy sources to (partly) replace fossil fuels in the future, oil markets may anticipate a future reduction in demand and increase current supply. The availability of ‘green’ technologies may increase damages. The insight comes from the basic exhaustible resource model. We reproduce the green paradox and to facilitate discussion differentiate between a weak and a strong version, related to short-term and long-term effects, respectively. Then we analyze the green paradox in 2 standard modifications of the exhaustible resource model. We find that increasing fossil fuel extraction costs counteracts the strong green paradox, while with imperfect energy substitutes both the weak and strong green paradox may vanish.

Keywords: Green Paradox, Climate Change, Exhaustible Resources, Fossil Fuels

JEL Classifications: Q31, Q54
Working Paper Series

I am experimenting with the all new Amazon links which are now worth doing (as the hassle factor has been reduced considerably).

You have to love Peak Oil and it's partner in crime "Hubbert's Peak".


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