Should we be worried about the green paradox? Announcement effects of the Acid Rain Program

- We empirically test the implication of the green paradox hypothesis using the announcement of the 1990 CAAA as a case study.
- We find that the price of coal dropped, and the sulphur premium increased.
- We identify a significant increase in coal use, but only for plants relying on spot market deliveries for a large share of their coal input.
- We do not find evidence that energy generators switched to dirtier coal.
- Our results support the mechanism predicted by the theory, but suggest that no paradox emerged.

This paper presents the first empirical test of the green paradox hypothesis, according to which well-intended but imperfectly implemented environmental policies may lead to detrimental outcomes due to supply side responses. We use the introduction of the Acid Rain Program in the U.S. as a case study. The theory predicts that owners of coal deposits, expecting future sales to decline, would supply more of their resource between the announcement of the Acid Rain Program and its implementation; moreover, the incentive to increase supply would be stronger for owners of high-sulfur coal. This would, all else equal, induce an increase in sulfur dioxide emissions. Using data on prices, heat input and sulfur content of coal delivered to U.S. power plants, we find strong evidence of a price decrease and of an increase in the sulfur premium, some indication that the amount of coal used might have increased, and no evidence of fuel-switching towards higher-sulfur coal. Overall, our evidence suggests that while the mechanism indicated by the theory might be at work, market conditions and concurrent regulation largely prevented a green paradox from arising. These results have implications for the design of climate policies.