Green Paradox revisited

A question that came up during the panel discussion I live-blogged in Helsinki concerned something called the Green Paradox.    A firm believer in the law of unintended consequences, my ears perked up when I heard that phrase.

Essentially, the Green Pardox says that efforts to reduce the emissions of greenhouse gasses are likely to have the opposite effect.   Hans-Werner Sinn spelled out how the Green Paradox is likely to unfold in the FT today:   "Governments are busily promoting alternative energy, improved building insulation and more efficient cars. These programmes cost billions - and probably achieve the exact opposite of what policymakers intend: the global extraction of coal, gas and oil shoots up instead of sinking."

I urge you to read the whole article which explains the dynamic interaction whereby uncoordinated climate policies will likely cause the rate of carbon extraction to increase.  Sinn laments that  "politics so far exhibits not the slightest glimmer of thinking in this direction....  The silence of politicians on how to slow down fossil fuel extraction smacks of denial."

Essentially, Hans-Werner Sinn concludes with a message that shows he is on the same page as Shell Chairman Jorma Ollila and Professor Charles Kolstad.   Sinn writes:

To be effective, environmental policy has two options: either it uses the tax system to make it unattractive for resource owners to convert their fossil fuel wealth into financial investments, or it creates a seamless consumer cartel through the establishment of a global emissions trading system. The emissions trading system would effectively put a cap on worldwide fossil fuel consumption, thereby achieving the desired slowdown in extraction rates. Furthermore, part of the proceeds would be diverted from resource owners' pockets to the national treasuries of the countries selling emissions certificates. 

For the reasons of political expediency best explained by Ollila, the cap and trade approach is the way to go. But the cap and trade proposal making its way through the US Congress -- like a doomed earlier European initiative* -- seems to fall too far short in relation to Sinn's last (emphasized) point.  Gregory Mankiw explains in a NYT oped:  "The problem occurred as this sensible idea made the trip from the campaign trail through the legislative process. Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests."   Credits need to be auctioned-off, not handed-off to polluters.  Because this money is needed to pay for the cost of the transition.

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* A article published by MIT explained this point with reference to the failed European cap and trade experiment.