Applying advanced economic analysis to climate change policies and the efficient use of resources can sometime lead to surprising and counter-intuitive outcomes. Indeed the longer term impact of some well-intentioned policy initiative may end up having a negative impact.
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It is important that these 'green paradoxes' are fully analysed and taken into account when setting climate action policy. For example, one green paradox suggests that subsidising a renewable energy source can actually increase the use of fossil fuels in the short-term. Anticipating future regulation, the owners of carbon resources may accelerate the production of fossil energy while they can, with the paradoxical effect of accelerating climate change and bringing forward the date at which fossil fuels become exhausted.
According to the economic analysis undertaken by the EU-funded project ‘Combating Climate Change: Political economy of Green Paradoxes (GP)’, one solution would be to introduce a CO2 tax which would rise at first, then gradually decline once the alternative energy source has been introduced.
The project is centred on the counterproductive side effects that climate change policies can have when they do not take into account the supply side of the fossil fuels markets.
Finding solutions to the effects of climate change requires scientific inputs from almost all disciplines including physics, biology, earth sciences, sociology, and economics. This research, which focuses on the economics underlying climate change, should help us identify methods both to mitigate the consequences of climate change and to adapt to its longer-term impact.
Ultimately, the GP project aims to provide policy recommendations by, for instance, examining imperfect competition in the oil market and distinguishing between dirty and clean alternatives for fossil fuels. These environmental policy proposals also address the adverse aspects of climate change policies such as green taxes on both developing economies and on the poorest countries of the advanced world.
Cees Withagen, Professor of Environmental Economics at VU University, Amsterdam, who received an ERC Advanced Grant 2010 for his GP project, explains that: “Many policy options can conceal a green paradox. For example, a subsidy favouring clean energy resources such as solar or wind will have the effect of decreasing the price at which this energy is supplied. But under some circumstances, the subsidy could have the unintended effect of increasing both extraction and emissions, instead of delaying them. The principal aim of the GP research project is to critically investigate such counter-intuitive outcomes and come up with sound policy recommendations which take into account both the demand and the supply dimensions of fossil fuels.”
Since 2007, over 50 projects have been funded by the European Research Council under the European Union’s 7th Research Framework Programme (FP7) to increase our understanding of the complexities of the climate model and its implications for societies and natural systems.