International Review of Environmental and Resource Economics > Vol 5 > Issue 4

The Green Paradox and Greenhouse Gas Reducing Investments

Michael Hoel, Department of Economics, University of Oslo, Norway,
Suggested Citation
Michael Hoel (2011), "The Green Paradox and Greenhouse Gas Reducing Investments", International Review of Environmental and Resource Economics: Vol. 5: No. 4, pp 353-379.

Publication Date: 25 Sep 2011
© 2011 M. Hoel
Environmental Economics
Climate changeCarbon taxGreen paradoxCommitmentExhaustible resources


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In this article:
1 Introduction 
2 The Green Paradox 101 
3 A Two-period Model for Resource Extraction and Investment in a Substitute 
4 The Effects of a Change in the Expected Future Carbon Tax 
5 The Social Optimum and the Role of Commitment 
6 Climate Costs and Carbon Tax Expectations 
7 The Effects of Subsidizing Investments in the Carbon Substitute 
8 Concluding Remarks 


If governments cannot commit to future carbon tax rates, investments in greenhouse gas mitigation will be based on uncertain and/or wrong predictions about these tax rates. Predictions about future carbon tax rates are also important for decisions made by owners of nonrenewable carbon resources. The effects of the size of expected future carbon taxes on near-term emissions and investments in substitutes for carbon energy depend significantly on how rapidly extraction costs increase with increasing total extraction. In addition, the time profile of the returns to investments in noncarbon substitutes is important for the effects on emissions and investments.