The supply-side climate policy of decreasing fossil fuel tax profiles: can subsidized reserves induce a green paradox?

Abstract

Fossil fuel producers develop too many reserves for combustion due to subsidies for upfront development costs. The conventional wisdom is that downward-sloping tax profles avoid green paradox outcomes by reducing present extraction. This paper shows that accounting for subsidized reserves development can induce green paradox outcomes for downward-sloping income tax profles. A theoretical model linking reserves development and extraction with climate change damages is developed to explore conditions for the weak and strong green paradox outcomes of higher present extraction and cumulative damages. We fnd that the weak green paradox arises under higher and fatter income tax profles. The strong green paradox is an ambiguous outcome without subsidized reserves development. Quantitative examples demonstrate the efect of downward-sloping tax profles on crude oil extraction and how the strong green paradox arises when delayed emissions are less relevant for damages Show more