Reducing fossil fuel demand accelerates warming by hastening resource extraction---their studies don’t assume macroeconomic effects

The climate problem is one of mankind’s biggest challenges. Averting disaster requires nothing less than worldwide collective policy action. However, policies that ignore the laws of economics may prove futile, if not downright counterproductive. In particular, policies aimed at reducing future demand for fossil fuels could backfire by inducing resource owners to bring forward their extraction plans, thus accelerating global warming. I have called this behaviour the Green Paradox. Economists and policy makers alike long overlooked the possibility of a Green Paradox because the behaviour of resource owners played no specific role in the economics of climate change. Although it has long been recognized that the anthropogenic carbon accumulating in the atmosphere is basically the same as the carbon taken from the ground and that, except for sequestration, no technical devices exist that could change the proportions accumulating in the sea, biomass, and atmosphere, this has rarely been incorporated into climate models or addressed by policy makers in the past. Instead the focus was on the demand side of the market. It was thought that to mitigate the climate problem, it would be effective and sufficient to require better insulation of homes, to extract higher mileage from car engines, to subsidize green energy through tariffs, to morally discredit fossil fuel consumption, to tax the use of fossil fuels, or to subsidize the development of green technologies, because it was taken for granted that supply would follow demand. Resource suppliers were perceived to be like car producers, facing flat marginal cost curves and producing what is demanded at given prices. However, unlike cars, fossil resources sold in the market are already there (i.e., in the earth’s crust) and thus cannot be “produced” in the normal sense of the word. Extraction and exploration costs are typically small relative to user costs. This means that we cannot assume that the supply reactions of resource owners will be elastic. Fortunately, the period of ignoring the obvious appears to be coming to an end. Although the supply-side view of the climate problem is not yet widely recognized by the public, both the Intergovernmental Panel on Climate Change and the literature on the economics of climate change are now giving at least as much weight to the supply side as to the demand side. The focus is on the intertemporal dimension of supply decisions, merging the traditional theory of exhaustible resources with the theory of climate change. Exhausting the stock of carbon resources in the ground and accumulating waste carbon in the atmosphere are now viewed and modelled as a single decision.