Abstract:
We analyze the effects of an announced future carbon tax increase on the extraction behaviorof a monopolistic supplier of a scarce fossil energy resource like oil in a two country, two periodgeneral equilibrium model with symmetric and homothetic preferences and no extractioncosts. Based on the monopolist’s strategic consideration of the interplay between the resourceand the capital market, and especially of the effects of the extraction decision on the returnon petrodollar financed capital investments we identify and analyze a new channel for thereversal of the green paradox, a major concern regarding carbon taxation. We employ a numericalsimulation and a sensitivity analysis with regard to the model parameters to evaluatethe prevalence of such a reversal of the green paradox and find that it robustly arises undera wide range of reasonable parameter settings.