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".


Is There Really a Green Paradox?

Rick Van der Ploeg (Oxford) is working on a number of interesting areas.

The green paradox is important and often over looked.

"The Green Paradox states that, in the absence of a tax on CO2 emissions, subsidizing a renewable backstop such as solar or wind energy brings forward the date at which fossil fuels become exhausted and consequently global warming is aggravated."

Seems obvious - is there a solution?

Is There Really a Green Paradox?

Rick Van der Ploeg
University of Oxford; European University Institute - Economics Department (ECO); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)

Cees Withagen
Free University of Amsterdam; Tilburg University

February 2010

CESifo Working Paper Series No. 2963

The Green Paradox states that, in the absence of a tax on CO2 emissions, subsidizing a renewable backstop such as solar or wind energy brings forward the date at which fossil fuels become exhausted and consequently global warming is aggravated. We shed light on this issue by solving a model of depletion of non-renewable fossil fuels followed by a switch to a renewable backstop, paying attention to timing of the switch and the amount of fossil fuels remaining unexploited. We show that the Green Paradox occurs for relatively expensive but clean backstops (such as solar or wind), but does not occur if the backstop is sufficiently cheap relative to marginal global warming damages (e.g., nuclear energy) as then it is attractive to leave fossil fuels unexploited and thus limit CO2 emissions. We show that, without a CO2 tax, subsidizing the backstop might enhance welfare. If the backstop is relatively dirty and cheap (e.g., coal), there might be a period with simultaneous use of the non-renewable and renewable fuels. If the backstop is very dirty compared to oil or gas (e.g., tar sands), there is no simultaneous use. The optimum policy requires an initially rising CO2 tax followed by a gradually declining CO2 tax once the dirty backstop has been introduced. We also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist.

Keywords: Green Paradox, Hotelling rule, non-renewable resource, renewable backstop, global warming, carbon tax, limit pricing

JEL Classifications: Q30, Q42, Q54
Working Paper Series

Monday, March 22, 2010

CO2 and its local impact

One of the difficulties with looking at CO2 emissions is the lack of a "local impact" of CO2. This causes problems both theoretically and empirically.

My recent paper "Stochastic Divergence or Convergence of Per Capita Carbon Dioxide Emissions: Re-examining the Evidence" potentially suffers from this problem.

Perhaps now "motivating" such a piece of work will be a little easier.

Cities hit more by CO2 emissions

Carbon dioxide, the main greenhouse gas driving climate change, is a global problem – but a study at Stanford University in California shows it is also harmful locally, affecting city dwellers much more than their rural cousins, as a result of CO2 “domes” that develop over urban areas.

Mark Jacobson, director of Stanford’s Atmosphere/Energy Programme, found that domes of higher CO2 concentrations cause local temperature increases, which in turn increase the amount of local air pollutants such as low-level ozone and soot particles in urban air. He estimated that urban CO2 caused 50-100 excess deaths a year in California and 300-1,000 for the US, on top of the health effects of other pollutants.

The study, published in the journal Environmental Science and Technology, provides the first scientific basis for controlling local CO2 emissions based on their damage to health, according to Prof Jacobson. It also exposes an oversight in current cap-and-trade proposals for reducing CO2 emissions.

“The cap-and-trade proposal assumes there is no difference in the impact of CO2, regardless of where it originates,” Prof Jacobson said. “This study contradicts that assumption. It doesn’t mean you can never do something like cap and trade – it just means that you need to consider where the CO2 emissions are occurring.”


Friday, March 19, 2010

Emissions FAIL

It is Friday after all.


Thursday, March 18, 2010

Tragedy of the Zimbabwe commons

From Marginal revolution.

A must read for Environmental Economics students.

See the Tragedy of the Commons [Marginal revolution]

In 2000 Zimbabwe began to forcibly redistribute land from private but predominantly white-owned commercial farms to much poorer black farmers who toiled on communal lands. Stunning pictures from Google Earth collected by Craig Richardson show the result.

Take a look at the Before picture. The communal land on the left is dry, dusty and unproductive compared to the private farmland on the right which is green and dotted with blue ponds and lakes. Why? There were two theories to explain this difference.

* The Tragedy of the Commons – the farmers on the communal lands did not have the incentives to invest in the land and thus the land eroded and turned to desert.

* The land on the right (which was owned mostly by whites) was better quality land.

Both theories could be true. Regarding the latter explanation, however, notice that the dry communal lands on the left are sharply delineated from the green private farms on the right--so sharply that soil quality and rainfall alone are unlikely to explain the difference.

So what happened after the land was redistributed beginning in 2000 and all of it made communal?

After reform the land quality worsened everywhere. In particular, note that the blue lakes and ponds on the right became dry and empty as farmers no longer had an incentive to invest in maintaining these resources. The tragedy of the commons.

This excellent visual look at the tragedy of the commons was produced by Todd Moss at The Center for Global Development based on pictures and ideas from Craig Richardson. Of course Zimbabwe had many problems before and after this forcible land redistribution. You can find more pictures, background information and a lengthier discussion of this episode here.

In addition, I have included the shifting graphic in a set of PowerPoint slides which could be incorporated in a classroom discussion of the tragedy of the commons. Feel free to modify these slides as you wish and thanks to the Center for Global Development for helping me to create the slides.

This post is an example of the material available at a new website designed for anyone teaching principles of economics and called, SeetheInvisibleHandBlog. At the new website you can can find videos, powerpoints, ideas, blog posts and much more. The material is nicely linked up with our textbook, Modern Principles, but we think that this website will be useful to anyone who teaches principles of economics.