Hans-Werner Sinn on the “green paradox”

by on February 24, 2012 at 3:50 am in Books, Economics | Permalink

The period of real [energy] price declines coincided with the emergence of the “green” movement and the re-orientation of the world energy policies by way of inducing direct demand restraints and introducing incentive systems to foster the development of “green” replacement technologies.  Thus, the threat of market destruction may indeed have increased the supply of fossil fuels enough to more than offset the growing world demand, thereby inducing real energy prices to fall, contrary to what a forward-looking explanation along the lines of Hotelling’s theory would have suggested prima facie.

That is from Sinn’s new book The Green Paradox: A Supply-Side Approach to Global Warming.

Jim Smith February 24, 2012 at 4:19 am

The Green Paradox or: How Liberals Learned to Stop Worrying and Love Reaganomics by Hans-Werner Sinn

Dean February 24, 2012 at 4:38 am

I’m not following how the development of replacement technologies increased the supply of fossil fuels.

Mike Giberson February 24, 2012 at 1:20 pm

Introduction of additional energy resources into the world economy should tend to reduce energy prices, which would normally discourage current production. But the thing about renewable resources is that they promise an increasing rather than decreasing supply of energy resources over time. So despite a current downward pressure on energy prices, the prospect for future expansion and high quality renewable technologies means that even more energy resources will be available in the future (so even stronger downward pressure on future energy prices). If tomorrow’s price is going to be lower than today’s price, then the owner of a finite stock of resources will have the incentive to produce as much as possible now.

Dean February 25, 2012 at 4:51 am

Thanks to both of you, that makes a lot of sense.

Floccina February 24, 2012 at 3:08 pm

One way that could work is by encouraging owners of rights to drill to produce and sell more now rather than wait for higher future prices.

prior_approval February 24, 2012 at 6:02 am

‘Thus, the threat of market destruction may indeed have increased the supply of fossil fuels enough to more than offset the growing world demand, thereby inducing real energy prices to fall….’

So, if I have understood this more or less correctly, the fossil fuel industry has been doing whatever it takes to ensure that no replacements will be able to compete on a price that the fossil fuel industry can control quite directly.

Strange – almost of as if no one remembers how Rockefeller worked. And the interesting tidbit at how America’s passenger vehicle fleet maintained the same general fuel economy for a generation after the peak of American oil production (1970 – http://www.econbrowser.com/archives/2011/10/peak_production.html ), two oil embargoes, and mandated fuel economy standards back in a time when the U.S. seemed a bit more sincere about maintaining energy independence would seem to say something about at least one industry’s ability to ensure as much money goes into its accounts as possible.

Cliff February 24, 2012 at 1:37 pm

What is “the fossil fuel industry” and how can it control “the price” “quite directly”?

The Original D February 25, 2012 at 10:52 pm

OPEC

Doc Merlin February 24, 2012 at 7:00 am

“And the interesting tidbit at how America’s passenger vehicle fleet maintained the same general fuel economy for a generation after the peak of American oil production”

You can blame safety regs for that!

IVV February 24, 2012 at 11:32 am

And the safety regs came from…

JWatts February 24, 2012 at 12:04 pm

Actually, increasing safety standards certainly contributed but it was EPA emission standards that really negatively effected mileage. However, the engines were improving at the same time so the observed effect was a nearly static mpg rating for a similar sized vehicle.

Frank February 24, 2012 at 7:31 am

Is it the first time that a german economist is cited?

Mike Giberson February 24, 2012 at 8:58 am

From the brief reference to Hotelling, I infer the explanation runs along the following lines:

Subsidized alternatives and, more to the point, the prospect of higher quality and perhaps still greater subsidies for alternatives in the future reverses the usual Hotelling expectation of higher future prices for an exhaustible resource. So contrary to the usual force of Hotelling incentives, which has a resource producer trading off today’s low price and tomorrow’s higher price, the prospect of ever cheaper substitutes means that the trade off is today’s low price or tomorrow’s even lower price. Message: produce and sell now before the substitutes take over the market.

axa February 24, 2012 at 1:07 pm

This is typical idea that is so simple but really hard to catch at first, thanks a lot for your words.

In a fairy world, oil & coal prices should go up when everybody knows they are depleting to exhaustion. But………in planet Earth, there are alternatives, why care? We have real alternatives right? Not only green hype?

Rahul February 24, 2012 at 2:50 pm

Is there an empirical way to test if this is indeed happening? Sounds dubious.

Mike Giberson February 24, 2012 at 9:02 am

Found this relevant reference:
H-W Sinn, 2008, “Public policies against global warming: a supply side approach,” INTERNATIONAL TAX AND PUBLIC FINANCE, VOL 15; NUMBER 4, pages 360-394

http://www.cesifo-group.de/portal/page/portal/ifoContent/N/rts/rts-mitarbeiter/IFOMITARBSINNCV/CVSinnPDF/CVSinnPDFrefjournals2007/ITAX-hws-2008.pdf

ABSTRACT: The countries that have ratified the Kyoto Protocol have pledged to limit global warming by reducing the demand for fossil fuels. But what about supply? If suppliers do not react, demand reductions by a subset of countries are ineffective. They simply depress the world price of carbon and induce the environmental sinners to consume what the Kyoto countries have economized on. Even worse, if suppliers feel threatened by a gradual greening of economic policies in the Kyoto countries that would damage their future prices; they will extract their stocks more rapidly, thus accelerating global warming. The paper discusses the remaining policy options against global warming from an intertemporal supply-side perspective.

Edwin February 29, 2012 at 9:50 am

This is indeed the original article on the green paradox. It triggered a lot of theoretical research in economics.

The reasoning is basically that some environmental policy triggers owners of stocks of fossil fuels (coal, oil, gas) to extract more of their stuff now, rather than in the future (note that these stocks are finite: what you sell now, you cannot sell in the future). This increases current supply of those fossil fuels, which induces lower prices, which in turn triggers an increase in demand, and eventually higher emissions.

By the way, there are more policies that (in theory) can start such a chain, such as announcement now of a future price/cap on emissions. [see an article that will (hopefully) appear on http://www.irere.net soon for more on the green paradox; it actually starts with exactly the abstract above as a quote.]

However, I think the green paradox is especially interesting for theoretical economists — and politicians who are against climate change mitigation policies — but not a big problem in reality. It requires resource owners to increase supply, and demanders to increase demand. It’s not easy to just start producing more coal, oil or gas. And it’s not easy to start using more coal (power plants; would require increased electricity demand), oil (car owners; would require lower prices at the pump) or gas (see coal).

reason February 24, 2012 at 11:02 am

“If suppliers do not react, demand reductions by a subset of countries are ineffective. They simply depress the world price of carbon and induce the environmental sinners to consume what the Kyoto countries have economized on. Even worse, if suppliers feel threatened by a gradual greening of economic policies in the Kyoto countries that would damage their future prices; they will extract their stocks more rapidly, thus accelerating global warming. The paper discusses the remaining policy options against global warming from an intertemporal supply-side perspective.”

Correct. And who has not been saying that? Only concerted international action will work.

JWatts February 24, 2012 at 12:12 pm

Most of the Green Lobby seems incoherent. The only really critical fossil fuel for global warming is coal. If the Green Lobby concentrated on replacing coal plants with Nuclear, some wind and natural gas, then CO2 production would plummet. Instead we have an incoherent series of actions that aren’t effective. A lot of effort is wasted on trivial issues (like the European Airline CO2 regulations) that will have almost no impact, but will cost a substantial amount of political capital to implement.

Edwin February 29, 2012 at 9:54 am

“If the Green Lobby concentrated on replacing coal plants with Nuclear, some wind and natural gas, then CO2 production would plummet.”

The argument is the other way round: If the Green Lobby concentrated on replacing coal plants with Nuclear, some wind and natural gas, then coal and oil producers would dump their stuff on the market, underpricing the other energy sources, so no-one would buy expensive energy from nuclear and wind but instead buy fossil fuels, increasing CO2 emissions.

Gabe February 24, 2012 at 1:35 pm

You guys miss the whole point of the global warming scare propaganda…they want a world wide tax agreement…they couldn’t care less about CO2 emissions.

The proof is in their actions.

revver February 24, 2012 at 5:38 pm

Am I to assume that energy prices are artificially low because: market distortion “a” (green energy subsidies) leads to market distortion “b” (reduced energy prices in the present)?

GeorgeNYC February 26, 2012 at 10:17 pm

I love economists. You could logically deduce that it the pressure of the air above us that holds us on this planet if that helped whatever ideogical bent you wanted to support. Which clearly in the case of this blog is generally libertarian. (which probably means big money conservatives somewhere in the background). Then you would feverishly start writing articles in your academic echo chamber to support your views.

Sorry Mr. Cowan but you lost whatever shred of integrity you might have in my eyes with your silly tweet about the Virginia anti-abortion bill. Like most rigid ideologues you will go to your grave secure in your own sense of purpose. With the firm beleif that your hermetically sealed and intellectually self-sustaining framework has actually brought light to something.

I hope that science can survice the dark ages that you are ushering in.

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