The green paradox of the economics of exhaustible resources

The green paradox states that an increasing tax on emissions of carbon dioxide, consonant with the expected increase in their marginal damages, may induce oil producers to shift their production toward the present and thereby to exacerbate the problem of climatic change. The model is based on Hotelling models of resource use that do not take the natural and technical features of oil production into account. Natural features include the decline of production through time according to a decline curve. Technical features include the requirement to sink investment in productive capacity. A model of a profit-maximizing firm indicates that, if these features are taken into account, the prediction of the green paradox is unlikely. (C) 2013 Elsevier Ltd. All rights reserved.