Green paradox

The green paradox, identified by German economist Hans-Werner Sinn, is the observation that an environmental policy that becomes greener with the passage of time acts like an announced expropriation for the owners of fossil fuel resources, inducing them to accelerate resource extraction and hence to accelerate global warming.

The green paradox’s line of reasoning starts by recognizing a fundamental, unavoidable fact: every carbon atom in the gas, coal or oil extracted from the ground to be used as fuel ends up in the atmosphere, in particular if high efficiency combustion processes ensure that no part of it ends up as soot. About a quarter of the emitted carbon will stay in the atmosphere practically forever, contributing to the greenhouse effect that causes global warming.

Apart from afforestation, only two things can mitigate the accumulation of carbon in the atmosphere: either less carbon is extracted from the ground, or it is injected back underground after harvesting its energy.

Environmental policy efforts, however, in particular European ones, go in neither of these two directions, aiming instead at the promotion of alternative, CO₂-free energy sources and a more efficient use of energy. In other words, they only address the demand side of the carbon market, neglecting the supply side. Despite considerable investment, the efforts to curtail demand have not entirely had the effect hoped for.

The reason behind this, according to Sinn, is that green policies, by heralding a gradual tightening of policy over the coming decades, exert a stronger downward pressure on future prices than on current ones, decreasing thus the rate of capital appreciation of the fossil fuel deposits. The owners of these resources regard this development with concern and react by increasing extraction volumes, converting the proceeds into investments in the capital markets, which offer higher yields. That is the green paradox: environmental policy slated to become greener over time acts as an announced expropriation that provokes owners to react by accelerating the rate of extraction of their fossil fuel stocks, thus accelerating climate change.

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Wikipedia