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This chapter presents a simple dynamic general equilibrium model of fossil fuel extraction when a backstop technology is available. We investigate the possibility of a Green-Paradox outcome as a result of technological progress of a backstop technology. In our chapter, we identify a new channel: technological progress influences the extraction path indirectly by a change in the equilibrium interest rate. This change induces a change in the time path of extraction in the opposite direction. We show that the indirect effect can be such strong that first-period or even aggregate extraction levels rise with technological progress.

This chapter sets out what the Green Paradox is and also discusses its limitations. Although too rapidly rising carbon taxes and renewable subsidies may accelerate global warming, they also incite fossil fuel owners to leave more fossil fuel in the crust of the earth which curbs global warming in the long run. The chapter briefly discusses the contributions of each of the following chapters of this volume. It discusses how this qualifies the original insights into the Green Paradox and also discusses some of the policy implications implied by the research on offer in this volume. It turns out that the presence of clean and dirty backstops, extraction costs that rise as reserves diminish, factor substitution elasticities, strategic issues and a host of other factors play an important role.

This chapter shows that a technological change that increases marginally the degree of substitutability of non-fossil fuels for fossil fuels may cause fossil fuels producers to anticipate lower demand in the future, and to react by increasing current extraction, leading to higher near-term emissions and accelerating climate change damages. Such a Green Paradox outcome is more likely to occur if the existing degree of substitutability is moderate or high. In fact, if the current degree of substitutability is near zero, then there will be no Green Paradox outcome associated with a marginal increase in substitutability.

This chapter deals with the effects of announcements of green policies that are delayed later on. Firstly, it shows that announcing a unit tax to start at some point in future that grows at the interest rate increases cumulative extraction until any given point in time compared to a zero tax policy. Secondly, an unexpected delay of the introduction of this tax at the originally announced starting date is discussed. While the Green Paradox literature usually states that lowering taxes implies less cumulative emissions, this is not true for postponing their introduction. Reoptimizing resource owners facing a period with unexpectedly low taxes speed up extraction during this period and correspondingly reduce their extraction later on. Consequently, cumulative extraction is higher at any given point in time. Moreover, cumulative extraction under the announcement-cum-delay policy is also higher than if the ultimately realized policy is announced already at the outset.

The green paradox arises from the reaction of non-renewable-resource suppliers in anticipation of future price changes. Yet there exists no formal treatment of non-renewable resource supply, systematically deriving quantity as function of price. Assuming a simple two-date setting, this chapter establishes instantaneous restricted (fixed reserves) and unrestricted resource supply functions and studies their basic properties. Supply at one date depends on the price at the other date. The effect of a price change can be decomposed into an intertemporal substitution effect and a stock compensation effect. Unlike the Slutsky decomposition of demand, the substitution effect always dominates so that a price increase at one date causes supply to decrease at the other date. The analysis can be used to explain policy-induced extraction changes like the green paradox by the method of partial equilibrium where supply intersects with demand.

Any path of positive, global climate taxes will, under realistic assumptions, reduce cumulative long-run emissions, that is, there is no very strong Green Paradox. A tax may, however, increase short-run emissions. The quantitative question whether initial increases or long-run reductions dominate the tax induced change of the relevant net present value of damages, is addressed in two ways. First, it is shown analytically that if a carbon tax is not seen as the only potential climate preservation measure – as independent additional political or technological developments in the future may play a role as well –, a strong Green Paradox may be much less likely than if the tax is assessed in isolation of other developments. Second, dynamic numerical simulations show that the structure of the extraction costs for the existing fossil fuel reserves makes the strong Green Paradox unlikely, even without future alternative measures and with high emission discount rates.

The focus of the green paradox literature has been either on demand-side climate policies or on effects of technological changes. The present chapter addresses the question of whether there also might be some kind of green paradox related to supply-side climate policies. Fossil fuels are non-renewable resources, and the term supply-side climate policy is used for policies that permanently remove some of the carbon resources. The main conclusion of the chapter is that there will no green paradox if supply-side climate policies are aimed at removing high-cost carbon reserves. If instead low-cost reserves are removed, the possibility that both early and total emissions increase cannot be ruled out. Hence, "wrong" supply-side climate policies may give a supply-side green paradox, since such policies may accelerate climate change.