Green paradox
Encyclopedia
The Green Paradox is a phrase coined by German economist Hans-Werner Sinn
to describe the fact that an environmental
policy
that becomes greener with the passage of time acts like an announced expropriation for the owners of fossil fuel
resources, inducing them to anticipate resource extraction
and hence to accelerate global warming
.
atom in the gas, coal or oil extracted from the ground to be used as fuel ends up in the atmosphere, in particular if high efficiency combustion processes ensure that no part of it ends up as soot. About a quarter of the emitted carbon will stay in the atmosphere practically forever, contributing to the greenhouse effect that causes global warming.
Apart from afforestation
, only two things can mitigate the accumulation of carbon in the atmosphere: either less carbon is extracted from the ground, or it is injected back underground after harvesting its energy.
Environmental policy efforts, however, in particular European ones, go in neither of these two directions, aiming instead at the promotion of alternative, CO2-free energy sources and a more efficient use of energy. In other words, they only address the demand side of the carbon market, neglecting the supply side. Despite considerable investment, the efforts to curtail demand have not reduced the aggregate amount of CO2 emitted globally, which continues to increase unabated.
The reason behind this, according to Sinn, is that green policies, by heralding a gradual tightening of policy over the coming decades, exert a stronger downward pressure on future prices than on current ones, decreasing thus the rate of capital appreciation of the fossil fuel deposits. The owners of these resources regard this development with concern and react by increasing extraction volumes, converting the proceeds into investments in the capital markets, which offer higher yields.
That is the green paradox: environmental policy slated to become greener over time acts as an announced expropriation that provokes owners to react by accelerating the rate of extraction of their fossil fuel stocks, thus accelerating climate change.
Countries that do not partake of the efforts to curb demand have a double advantage. They burn the carbon set free by the “green” countries (leakage effect
) and they also burn the additional carbon extracted as a reaction to the announced and expected price cuts resulting from the gradual greening of environmental policies (green paradox).
Sinn writes in his abstract that: "[Demand reduction strategies] simply depress the world price of carbon and induce the environmental sinners to consume what the Kyoto countries have economized on. Even worse, if suppliers feel threatened by a gradual greening of economic policies in the Kyoto countries that would damage their future prices, they will extract their stocks more rapidly, thus accelerating global warming."
Sinn emphasizes that a condition for the green paradox is that the resource be scarce in the sense that its price will always be higher than the unit extraction and exploration costs combined. He points out that this condition is likely to be satisfied as backstop technologies will at best offer a perfect substitute for electricity, but not for fossil fuels. The prices of coal and crude oil are currently many times higher than the corresponding exploration and extraction costs combined.
Hans-Werner Sinn
Hans-Werner Sinn is a German economist and President of the Ifo Institute for Economic Research.- Education and career :...
to describe the fact that an environmental
Environmentalism
Environmentalism is a broad philosophy, ideology and social movement regarding concerns for environmental conservation and improvement of the health of the environment, particularly as the measure for this health seeks to incorporate the concerns of non-human elements...
policy
Public policy
Public policy as government action is generally the principled guide to action taken by the administrative or executive branches of the state with regard to a class of issues in a manner consistent with law and institutional customs. In general, the foundation is the pertinent national and...
that becomes greener with the passage of time acts like an announced expropriation for the owners of fossil fuel
Fossil fuel
Fossil fuels are fuels formed by natural processes such as anaerobic decomposition of buried dead organisms. The age of the organisms and their resulting fossil fuels is typically millions of years, and sometimes exceeds 650 million years...
resources, inducing them to anticipate resource extraction
Resource extraction
The related terms natural resource extraction both refer to the practice of locating, acquiring and selling natural resources....
and hence to accelerate global warming
Global warming
Global warming refers to the rising average temperature of Earth's atmosphere and oceans and its projected continuation. In the last 100 years, Earth's average surface temperature increased by about with about two thirds of the increase occurring over just the last three decades...
.
Main line of reasoning
The Green Paradox’s line of reasoning starts by recognizing a fundamental, unavoidable fact: every carbonCarbon
Carbon is the chemical element with symbol C and atomic number 6. As a member of group 14 on the periodic table, it is nonmetallic and tetravalent—making four electrons available to form covalent chemical bonds...
atom in the gas, coal or oil extracted from the ground to be used as fuel ends up in the atmosphere, in particular if high efficiency combustion processes ensure that no part of it ends up as soot. About a quarter of the emitted carbon will stay in the atmosphere practically forever, contributing to the greenhouse effect that causes global warming.
Apart from afforestation
Afforestation
Afforestation is the establishment of a forest or stand of trees in an area where there was no forest. Reforestation is the reestablishment of forest cover, either naturally or artificially...
, only two things can mitigate the accumulation of carbon in the atmosphere: either less carbon is extracted from the ground, or it is injected back underground after harvesting its energy.
Environmental policy efforts, however, in particular European ones, go in neither of these two directions, aiming instead at the promotion of alternative, CO2-free energy sources and a more efficient use of energy. In other words, they only address the demand side of the carbon market, neglecting the supply side. Despite considerable investment, the efforts to curtail demand have not reduced the aggregate amount of CO2 emitted globally, which continues to increase unabated.
The reason behind this, according to Sinn, is that green policies, by heralding a gradual tightening of policy over the coming decades, exert a stronger downward pressure on future prices than on current ones, decreasing thus the rate of capital appreciation of the fossil fuel deposits. The owners of these resources regard this development with concern and react by increasing extraction volumes, converting the proceeds into investments in the capital markets, which offer higher yields.
That is the green paradox: environmental policy slated to become greener over time acts as an announced expropriation that provokes owners to react by accelerating the rate of extraction of their fossil fuel stocks, thus accelerating climate change.
Countries that do not partake of the efforts to curb demand have a double advantage. They burn the carbon set free by the “green” countries (leakage effect
Carbon leakage
Carbon leakage occurs when there is an increase in carbon dioxide emissions in one country as a result of an emissions reduction by a second country with a strict climate policy.Carbon leakage may occur for a number of reasons:...
) and they also burn the additional carbon extracted as a reaction to the announced and expected price cuts resulting from the gradual greening of environmental policies (green paradox).
Sinn writes in his abstract that: "[Demand reduction strategies] simply depress the world price of carbon and induce the environmental sinners to consume what the Kyoto countries have economized on. Even worse, if suppliers feel threatened by a gradual greening of economic policies in the Kyoto countries that would damage their future prices, they will extract their stocks more rapidly, thus accelerating global warming."
Sinn emphasizes that a condition for the green paradox is that the resource be scarce in the sense that its price will always be higher than the unit extraction and exploration costs combined. He points out that this condition is likely to be satisfied as backstop technologies will at best offer a perfect substitute for electricity, but not for fossil fuels. The prices of coal and crude oil are currently many times higher than the corresponding exploration and extraction costs combined.