CARBON LEAKAGE, THE GREEN PARADOX, AND PERFECT FUTURE MARKETS

Policies of lowering carbon demand may aggravate instead of alleviate climate change (green paradox). In a two-period, three-country general equilibrium model with finite endowment of fossil fuel, one country enforces an emissions cap in the first or second periods. When that cap is tightened, the extent of carbon leakage depends on the interaction of various parameters and elasticities. Conditions for the green paradox are specified. All determinants of carbon leakage resulting from tightening the first-period cap work in the opposite direction when the second-period cap is tightened. Tightening the second-period cap does not necessarily lead to the green paradox.