Reassessing the Green Paradox

This paper deals with possible foreign reactions to domestic carbon demand reducing policies. It differentiates between demand side and supply side reactions as well as between intra- and intertemporal shifts of greenhouse gas emissions. In our model, we integrate increasing marginal physical extraction costs of fossil fuels into the general equilibrium carbon leakage model of Eichner & Pethig (2011). The results are as follows: The conditions for the emergence of the weak green paradox are similar but somewhat tighter than those derived by Eichner & Pethig (2011). Additionally, a strong green paradox can arise in our model under supplemental constraints. That means a “green" policy measure might not only lead to an acceleration of fossil fuel extraction but to an increase in the cumulative extraction.