When do increasing carbon taxes accelerate global warming? A note on the green paradox

The “green paradox” by Hans–Werner Sinn suggests that increasing resource taxes accelerate global warming because resource owners increase near-term extraction in fear of higher future taxation. In this note we show that this effect does only occur for the specific set of carbon taxes that increase at a rate higher than the effective discount rate of the resource owners. We calculate a critical initial value for the carbon tax that leads to a decreased cumulative consumption over the entire (infinite) time horizon. Applying our formal findings to carbon taxes for several mitigation targets, we conclude that there is a low risk of a green paradox in case the regulator implements and commits to a permanently mal-adjusted tax. This remaining risk can be avoided by emissions trading scheme as suggested by Sinn—as long as the emission caps are set appropriately and the intertemporal permit market works correctly.

Research highlights► Fast increasing carbon taxes accelerate global warming if they start at a low level. ► Appropriately high carbon taxes can always reduce cumulative emissions. ► Many existing tax proposals are unlikely to accelerate global warming. ► Capital income taxes cannot reduce cumulative emissions.