International Capital Markets, Oil Producers and the Green Paradox

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given. The effects of stock-dependent extraction costs are separately discussed in an Appendix.
Original languageEnglish
Pages (from-to)275-297
JournalEuropean Economic Review
Volume76
Issue numberMay
DOIs
Publication statusPublished - 2015

Fingerprint

Oil
Paradox
International capital markets
General equilibrium
Carbon tax
Importing
Interest rates
Partial equilibrium
Oil demand
Fossil fuels
Demand function
Exhaustion
Global warming
Welfare analysis
Exporting
Costs

Cite this

@article{a37e0eb19a244ce5bbd85c2f321246ef,
title = "International Capital Markets, Oil Producers and the Green Paradox",
abstract = "A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given. The effects of stock-dependent extraction costs are separately discussed in an Appendix.",
author = "{van der Meijden}, G.C. and {van der Ploeg}, R. and C.A.A.M. Withagen",
year = "2015",
doi = "10.1016/j.euroecorev.2015.03.004",
language = "English",
volume = "76",
pages = "275--297",
journal = "European Economic Review",
issn = "0014-2921",
publisher = "Elsevier",
number = "May",

}

International Capital Markets, Oil Producers and the Green Paradox. / van der Meijden, G.C.; van der Ploeg, R.; Withagen, C.A.A.M.

In: European Economic Review, Vol. 76, No. May, 2015, p. 275-297.

Research output: Contribution to JournalArticleAcademicpeer-review

TY - JOUR

T1 - International Capital Markets, Oil Producers and the Green Paradox

AU - van der Meijden, G.C.

AU - van der Ploeg, R.

AU - Withagen, C.A.A.M.

PY - 2015

Y1 - 2015

N2 - A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given. The effects of stock-dependent extraction costs are separately discussed in an Appendix.

AB - A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given. The effects of stock-dependent extraction costs are separately discussed in an Appendix.

U2 - 10.1016/j.euroecorev.2015.03.004

DO - 10.1016/j.euroecorev.2015.03.004

M3 - Article

VL - 76

SP - 275

EP - 297

JO - European Economic Review

JF - European Economic Review

SN - 0014-2921

IS - May

ER -