Brown Backstops versus the Green Paradox (Replaced by CentER DP 2011-110)

Imperfect climate policies may be ineffective when fossil fuel owners respond by shifting their supply spatially (coined carbon leakage) or intertemporally (the green paradox). Though these effects are usually analyzed separately, the underlying mechanisms are similar. Exhaustibleffossil fuel owners must trade off present and future extraction or supplying one country and the other. Whereas this is a plausible representation for oil and natural gas, important emission-intensive substitutes such as coal and uncoventional oil are so abundant that their owners face no such trade-off. A decrease in coal demand in one time period or region will therefore not trigger an equal increase in supply in the other. Moreover, if imperfect climate policies causes oil and natural gas owners to supply more in the near future or in countries with lax regulation, demand for dirtier substitutes will go down. Both effects mitigate intertemporal and spatial carbon leakage. When the substitutability between oil and coal differs across time periods or countries, a 'strong green orthodox' may occur.