Searching for the Green Paradox

Dr Christophe McGlade, UCL Institute for Sustainable Resources

The green paradox suggests that some policies aimed at reducing greenhouse gas (GHG) emissions in the long-term can perversely cause them to increase in the short-term. The logic is as follows: policy measures aimed at increasingly reducing the demand for GHG-intensive goods and activities will reduce the future value of GHG-intensive resources. These policies therefore tend to encourage owners of such resources, seeking to maximise discounted future revenues, to extract more in the present. Fossil fuel prices consequently fall, consumption increases and GHG emissions rise in the near term.

To date, most analysis of the green paradox has been carried out using theoretical or toy models. This paper uses the global integrated assessment model TIAM-UCL to explore dynamics of the green paradox for the first time using a model with a much more accurate representation of the energy system. This paper aims to analyse some of the key aspects of the green paradox, including the conditions and situations in which it arises, the extent to which its effects are significant, and the drivers of any emissions leakage that may occur. Shifts in fossil fuel consumption are examined alongside changes in emissions to investigate the drivers of any changes that occur.

The green paradox literature generally focuses on the effects of a CO2 tax on emissions levels, and so this work incorporates a number of steadily rising CO2 taxes in all of the scenarios that are generated. One set of scenarios is run to investigate whether the timing of the introduction of an increasingly stringent CO2 tax is important. Surprisingly, given that it relates to inter-temporal emissions leakage, none of the existing analysis of the green paradox discusses whether the temporal dynamics of the energy system affect its likelihood of occurrence or magnitude. The second set of scenarios is designed to test the hypothesis that the green paradox will not arise if the rate of increase of CO2 tax is less than the discount rate of the resource holders, but may arise if it rises at rates greater than this depending on the initial tax level.

Early results indicate that the timing of the introduction of a rising CO2 tax is fundamental to whether the green paradox is a relevant phenomenon or not. The green paradox effect is strongest in a situation with a distant prospect of strong emissions abatement measures being introduced but with weak or non-existent measures in the interim. This situation corresponds closely to the current political discussions over GHG emissions reductions. If there is a delay in introducing the tax, we have found that the green paradox arises under a range of rates of increase (greater than, equal to, or less than fossil fuel holders’ discount rates) and under a range of initial and final tax levels. Nevertheless, we have also found that even at its most prevalent, when considered over the long term, the green paradox effect is small compared to the subsequent emissions reductions that occur because of the introduction of the CO2 tax. Therefore, while increasing near-term emissions should obviously be avoided if possible, results suggest that the green paradox should not preclude the introduction of a rising emissions tax as a method of mitigating greenhouse gas emissions.