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Is all demand-side mitigation policy doomedto fail?Axel Michaelowa aa Centre for Comparative and International Studies, Political Economyof Development, Institute of Political Science, University of Zurich,Affolternstrasse 56, Zurich, 8050, SwitzerlandPublished online: 27 Jul 2012.

To cite this article: Axel Michaelowa (2012) Is all demand-side mitigation policy doomed to fail?, ClimatePolicy, 12:6, 784-786, DOI: 10.1080/14693062.2012.706957

To link to this article: http://dx.doi.org/10.1080/14693062.2012.706957

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Is all demand-side mitigation policy doomed to fail?The Green Paradox

Hans-Werner Sinn; MIT Press, Cambridge, USA, 2012, 269 pp, £20.95, ISBN 978 0 262 01668 1

Reviewed by Axel Michaelowa*Centre for Comparative and International Studies, Political Economy of Development, Institute of Political Science,

University of Zurich, Affolternstrasse 56, Zurich 8050, Switzerland

Hans-Werner Sinn has a reputation as a disputatiousGerman economist renowned for his blunt statements onkey economic issues of the day (such as German unification,foreign trade surpluses, or the Euro crisis), frequentlyopposing the political mainstream. Although he has alwaysbeen interested in environmental economics, he onlybecame active in assessing international and nationalclimate policies in the late 2000s. His book Das GruneParadoxon (Sinn, 2008) triggered an intense debate inGermany about the right way to engage in GHG emissionsmitigation policy. Given that Sinn is not a climate sceptic,his theses on the inappropriateness of emissions mitigationpolicies for consumers of fossil fuels attracted considerableattention. An expanded and updated edition is now availablein English. This will certainly move the German debate on theGreen Paradox to an international level.

Only a third of the book actually deals with the issues ofa green paradox, and digressions dilute the power ofSinn’s arguments. The lengthy chapters on climatechange, energy policy, and biofuels should have been sig-nificantly shortened and more space devoted to exploringthe main idea.

The key thesis of Sinn’s book is simple: all demand-side emissions mitigation policies are bound to failbecause owners of fossil fuel resources will acceleratefuel extraction in a way that will cause total GHG emissionsto increase compared to the situation without the mitiga-tion policy. The only way to prevent this undesirablesituation is the immediate introduction of a globalcap-and-trade system. If this is not possible – and Sinnpresents all the economists’ arguments from game theorythat support the argument that a global cap is utopian –then the only alternative is to introduce source taxes on

the capital revenues of invested ‘petrodollars’. Sinn arguesthat this would be the only way to slow down fossil fuelextraction, as it would then become less attractive to sellfuel and reinvest the revenues. Moreover, it is suggestedthat the West should refrain from interfering with the poli-tics of fossil fuel exporters. Any perceived uncertainty forthe leadership in exporting countries would lead to higherextraction rates, as the leaders cannot know whether theywill be able to collect revenues from fuel sales in the future.A cynical caricature of this argument could take the form ofguaranteeing the long-term survival of autocratic regimesin order to mitigate climate change.

Sinn bases his argument on neoclassical intertemporaleconomic models, starting with the well-known ‘Hotelling’rule that requires resource owners to extract fuels in a waythat price increases equal the rate of return of capital. Itassumes that any climate policy will lead to an expectationof future price decreases compared to the baseline pricedevelopment. Thus, fuel producers would respond in theshort term by increasing their production to benefit fromthe higher return on the capital raised from the fuel sale.The gradual introduction of carbon prices would only wor-sen the situation. As fuel producers come to realize thatfuture revenues from fuel sales are likely to decrease,they will further accelerate production.

Sinn only identifies two direct ways to prevent this reac-tion. The first would be a policy that initially introduces avery high carbon price in a big bang, then graduallyreduces the carbon price over time in order to keep intactthe expectation of a future increase of revenues from fuelsales. Of course, such a big bang policy is politically unac-ceptable, as it would lead to massive losses in capitalstock. (Indeed, it is rather surprising that Sinn does not

B *E-mail: axel.michaelowa@pw.uzh.ch

B outlook: book review

CLIMATE POLICY 12 (2012) 784–786

http://dx.doi.org/10.1080/14693062.2012.706957 # 2012 Taylor & Francis ISSN: 1469-3062 (print), 1752-7457 (online) www.tandfonline.com/tcpo

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discuss this issue.) The second way would be to introducesuddenly a cap-and-trade system covering all countries.This would surprise the fuel producers and thus preventa fossil fuel glut by effectively circumventing their ‘Hotell-ing’ strategy. If a black market in fossil fuels could be pre-vented, then this approach could allow a gradualtightening without adverse impacts.

Curiously, Sinn does not reflect on other research thathas argued that climate policy should apply to the produ-cer side. For example, Massarat (2000) proposed that fos-sil fuel producers limit fuel export and capture the rentsinstead of allowing consumer countries to levy fuel taxes.

It is worth examining the two key assumptions underpin-ning the green paradox concept: (i) fuel extraction costs arekept well below the market price and (ii) the absence of abackstop technology that could replace fossil fuel.

Sinn argues that oil extraction costs are around US$2/barrel in the Middle East, so oil producers still make aprofit, even if the oil price collapses. However, this argu-ment no longer holds true for new oil fields, where extrac-tion costs are rising steeply (Seljom and Rosenberg, 2011,p. 118). Fischer and Salant (2012) apply a model with ris-ing extraction costs, which suggests that the book’sassumptions become less relevant as the stringency ofmitigation policies increases over time.

Sinn also thinks that no backstop technology exists forthe transport sector because of the unrivalled energy den-sity of oil. Liquid biofuels (the only comparable alternative)would consume too much agricultural land and thereforelead to increased global food prices. This superficial dis-missal of the backstop technology is the weak underbellyof the green paradox, and has led to intense work by manyresearchers. The modelling work by Hoel (2010) andHabermacher and Kirchgassner (2011) shows that anincreasing carbon tax does not face a green paradoxunder existence of a backstop, while Fischer and Salant(2012) find that a cost reduction in a backstop acceleratesfossil fuel extraction.

Developments in renewable energy technology andtheir ongoing reduction in cost show that a set of robustbackstop technologies for electricity production is likelyto arrive in the next two decades. Given that the extractioncosts of coal are high, the replacement of coal by renew-ables does not face the green paradox curse. This also jus-tifies the separate renewable energy support policies thatare relentlessly criticized by Sinn as being nonsensicalunder a cap-and-trade system. Given that coal-basedelectricity production is still responsible for the majorityof anthropogenic CO2 emissions, the emergence of arenewable electricity backstop would decrease thepressure placed on the climate system.

Even if one were to accept the basic assumptions ofSinn’s theory, economists who have worked with Sinn’smodel (Edenhofer and Kalkuhl, 2011) find that the greenparadox does not apply if a carbon tax grows at a rate thatis less than the discount rate of the fossil fuel producers.

Other inconsistencies and issues have also been over-looked in the book. Sinn argues that ‘sealing off’ fossil fuelreserves (as proposed by the Ecuadorian government inthe case of the Yasuni oil field) should not be undertaken,because future generations might draw a larger utility fromexploiting these reserves than by leaving them in theground. Sinn’s stance appears to support the exploitationof all fossil fuel reserves. This seemingly contradicts thebook’s aim to reduce anthropogenic GHGs. Sinn seesforestry as an appropriate mitigation policy, there is noacknowledgement in the book that an expansion of landdevoted to forestry would lead to the same effect onfood prices as was argued for the case of biofuels. Carboncapture and storage is only briefly and incorrectly men-tioned. This is a pity, because it could provide the perfectsolution in Sinn’s framework, in that it constitutes a policythat does not influence fuel prices as long as it is paid forby the consumer countries. Climate engineering (seeCrutzen, 2006; Royal Society, 2009) is ignored entirely,despite being an ideal policy in Sinn’s framework of analy-sis, inasmuch that it does not influence fossil fuel marketsat all.

The introduction of the counterintuitive green paradoxhypothesis has rightly woken up the climate policy com-munity. Given that the research community is activelyassessing the validity of the green paradox (see Fischerand Salant (2012) for an assessment of which mitigationpolicies would face the lowest reaction from fossil fuel sup-pliers), it is too early to have a definitive answer. It is, how-ever, likely that the strong version of the green paradoxdoes not exist, which means that renewable energy pol-icies as well as partial climate policies continue to makeeconomic sense.

Before the dust settles, the policy community shouldengage with the supply side. Fortunately, the hosting ofCOP 18 by Qatar and the first signs of renewable energypolicies on the Arabian peninsula give hope that fossilfuel exporters actually acknowledge the possibility of abackstop emerging and diversification away from fossilfuels. This could be accelerated by levying a carbon taxon oil exports, the proceeds of which could be reinvestedin renewable energy and energy efficiency improvements.In 2000, Saudi oil minister Yamani presciently remarked:‘The Stone Age came to an end, not because we had alack of stones, and the oil age will come to an end notbecause we have a lack of oil’.

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References

Crutzen, P., 2006, ‘Albedo enhancement by stratosphericsulfur injections: a contribution to resolve a policydilemma?’, Climatic Change 77, 211–220.

Edenhofer, O., Kalkuhl, M., 2011, ‘When do increasing car-bon taxes accelerate global warming? A note on theGreen Paradox’, Energy Policy 39, 2208–2212.

Fischer, C., Salant, S., 2012, Alternative climate policiesand intertemporal emissions leakage, Discussion Paper12–16, Resources for the Future, Washington, DC.

Habermacher, F., Kirchgassner, G., 2011, Climate effectsof carbon taxes, taking into account possible otherfuture climate measures, Discussion Paper No. 2011–10, School of Economics and Political Science,

Department of Economics, University of St Gallen, StGallen, Switzerland.

Hoel, M., 2010, Is there a Green Paradox?, Working Paper3168, CESifo Group, Munich.

Massarat, M., 2000, Das Dilemma der okologischenSteuerreform. Pladoyer fur eine nachhaltige Klimapolitikdurch Mengenregulierung und neue politische Allian-zen (2nd edn), Metropolis, Marburg.

Royal Society, 2009, Geoengineering the Climate:Science, Governance and Uncertainty, London.

Seljom, P., Rosenberg, E., 2011, ‘A study of oil and naturalgas resources and production’, International Journal ofEnergy Sector Management 5, 101–124.

Sinn, H.-W., 2008, Das grune Paradoxon – Pladoyer fureine illusionsfreie Klimapolitik, Econ Verlag, Dusseldorf.

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