The green paradox and learning-by-doing in the renewable energy sector

• We analyze the green paradox in the presence of learning-by-doing in the renewable energy sector in a two period framework.
• Delayed carbon taxation may decrease current emissions.
• This is a reversal of the green paradox.
• Subsidizing current renewable energy may increase current emissions.
• The effect of more effective learning on current emissions is ambiguous.

The green paradox conveys the idea that climate policies may have unintended side effects when taking into account the reaction of fossil fuel suppliers. The prospect of carbon taxes being implemented in the future induces resource owners to extract more rapidly which increases present carbon dioxide emissions and accelerates global warming. However, our results suggest that future carbon taxes may decrease present emissions if resource owners face increasing marginal extraction costs and if there is a clean energy source that is a perfect substitute and exhibits learning-by-doing (LBD).If the marginal extraction cost curve is sufficiently flat, resource owners respond to a future carbon tax by lowering total extraction and only slightly increasing present extraction. Moreover, taxation leads to higher energy prices which induces renewable energy firms to increase output not only in the future, but also in the present because of the anticipated benefits from LBD. This crowds out energy from the combustion of fossil fuels and may outweigh the initial increase in present extraction, leading to less emissions in the present.