The green paradox conveys the idea that climate policies may have unintended
side effects when taking into account the reaction of fossil fuel suppliers.
In particular, carbon taxes that will be implemented in the future induce
resource owners to extract more rapidly which increases present carbon dioxide
emissions and accelerates global warming. Our results suggest that future
carbon taxes may even decrease present emissions if resource owners face
increasing marginal extraction costs and if there is a clean energy source
that is a perfect substitute and exhibits learning-by-doing (LBD). If the
marginal extraction cost curve is sufficiently at, resource owners respond to
a future carbon tax with lowering total extraction and only slightly increase
present extraction. Moreover, taxation leads to higher energy prices which
induces the renewable energy firms to increase output not only in the future,
but also in the present because of the anticipated benefits from LBD. This
crowds out energy from the combustion of fossil fuels and may outweigh the
initial increase in present extraction, leading to less emissions in the
present