Divestment prevails over the green paradox when anticipating strong future climate policies

Abstract

Fossil fuel market dynamics will have a significant impact on the effectiveness of climate policies1. Both fossil fuel owners and investors in fossil fuel infrastructure are sensitive to climate policies that threaten their natural resource endowments and production capacities2,3,4, which will consequently affect their near-term behaviour. Although weak in near-term policy commitments5,6, the Paris Agreement on climate7 signalled strong ambitions in climate change stabilization. Many studies emphasize that the 2 °C target can still be achieved even if strong climate policies are delayed until 20308,9,10. However, sudden implementation will have severe consequences for fossil fuel markets and beyond and these studies ignore the anticipation effects of owners and investors. Here we use two energy–economy models to study the collective influence of the two central but opposing anticipation arguments, the green paradox11 and the divestment effect12, which have, to date, been discussed only separately. For a wide range of future climate policies, we find that anticipation effects, on balance, reduce CO2 emissions during the implementation lag. This is because of strong divestment in coal power plants starting ten years ahead of policy implementation. The green paradox effect is identified, but is small under reasonable assumptions.

Access options

Rent or Buy article

Get time limited or full article access on ReadCube.

from$8.99

All prices are NET prices.

Fig. 1: Global CO2 emission dynamics.
Fig. 2: Fossil fuel market dynamics.
Fig. 3: Differences in global annual capacity additions to the baseline for key electricity technologies.

References

  1. 1.

    Bauer, N. et al. CO2 emission mitigation and fossil fuel markets: Dynamic and international aspects of climate policies. Technol. Forecast. Soc. Chang. 90, 243–256 (2015).

    Article  Google Scholar 

  2. 2.

    Griffin, P. A., Jaffe, A. M., Lont, D. H. & Dominguez-Faus, R. Science and the stock market: Investors’ recognition of unburnable carbon. Energy Econ. 52, 1–12 (2015).

    Article  Google Scholar 

  3. 3.

    McGlade, C. & Ekins, P. The geographical distribution of fossil fuels unused when limiting global warming to 2 °C. Nature 517, 187–190 (2015).

    CAS  Article  Google Scholar 

  4. 4.

    Bauer, N. et al. Global fossil energy markets and climate change mitigation—an analysis with REMIND. Clim. Chang. 136, 69–82 (2016).

    Article  Google Scholar 

  5. 5.

    Fawcett, A. A. et al. Can Paris pledges avert severe climate change? Science 350, 1168–1169 (2015).

    CAS  Article  Google Scholar 

  6. 6.

    Iyer, G. C. et al. The contribution of Paris to limit global warming to 2 °C. Environ. Res. Lett. 10, 125002 (2015)..

  7. 7.

    Adoption of the Paris Agreement FCCC/CP/2015/L.9/Rev.1 (UNFCCC, 2015).

  8. 8.

    Rogelj, J., McCollum, D. L., Reisinger, A., Meinshausen, M. & Riahi, K. Probabilistic cost estimates for climate change mitigation. Nature 493, 79–83 (2013).

    Article  Google Scholar 

  9. 9.

    The Emissions Gap Report 2015 (UNEP, 2015).

  10. 10.

    Riahi, K. et al. Locked into Copenhagen pledges — Implications of short-term emission targets for the cost and feasibility of long-term climate goals. Technol. Forecast. Soc. Chang. 90, 8–23 (2015).

    Article  Google Scholar 

  11. 11.

    Jensen, S., Mohlin, K., Pittel, K. & Sterner, T. An introduction to the green paradox: the unintended consequences of climate policies. Rev. Environ. Econ. Policy 9, 246–265 (2015).

    Article  Google Scholar 

  12. 12.

    Schellnhuber, H. J., Rahmstorf, S. & Winkelmann, R. Why the right climate target was agreed in Paris. Nat. Clim. Chang. 6, 649–653 (2016).

    Article  Google Scholar 

  13. 13.

    Luderer, G., Bertram, C., Calvin, K., Cian, E. D. & Kriegler, E. Implications of weak near-term climate policies on long-term mitigation pathways. Clim. Chang. 136, 127–140 (2016).

    Article  Google Scholar 

  14. 14.

    Johnson, N. et al. Stranded on a low-carbon planet: Implications of climate policy for the phase-out of coal-based power plants. Technol. Forecast. Soc. Chang. 90, 89–102 (2015).

    Article  Google Scholar 

  15. 15.

    Sinn, H.-W. Public policies against global warming: a supply side approach. Int. Tax. Public Finan. 15, 360–394 (2008).

    Article  Google Scholar 

  16. 16.

    van der Ploeg, F. & Withagen, C. Global warming and the green paradox: a review of adverse effects of climate policies. Rev. Environ. Econ. Policy 9, 285–303 (2015).

    Article  Google Scholar 

  17. 17.

    van der Werf, E. & di Maria, C. Imperfect environmental policy and polluting emissions: the green paradox and beyond. Int. Rev. Environ. Resour. Econ. 6, 153–194 (2012).

    Article  Google Scholar 

  18. 18.

    Bosetti, V., Carraro, C. & Tavoni, M. Climate change mitigation strategies in fast-growing countries: The benefits of early action. Energy Econ. 31, S144–S151 (2009).

    Article  Google Scholar 

  19. 19.

    Blanford, G. J., Richels, R. G. & Rutherford, T. F. Feasible climate targets: the roles of economic growth, coalition development and expectations. Energy Econ. 31, S82–S93 (2009).

    Article  Google Scholar 

  20. 20.

    IAMC AR5 Scenario Database (IPCC WGIII, 2014) https://secure.iiasa.ac.at/web-apps/ene/AR5DB/.

  21. 21.

    Kilian, L. & Murphy, D. P. The role of inventories and speculative trading in the global market for crude oil. J. Appl. Econ. 29, 454–478 (2014).

    Article  Google Scholar 

  22. 22.

    Krichene, N. World crude oil and natural gas: a demand and supply model. Energy Econ. 24, 557–576 (2002).

    Article  Google Scholar 

  23. 23.

    Jakobsson, K., Bentley, R., Söderbergh, B. & Aleklett, K. The end of cheap oil: bottom-up economic and geologic modeling of aggregate oil production curves. Energy Policy 41, 860–870 (2012).

    Article  Google Scholar 

  24. 24.

    BP Statistical Review of World Energy June 2016 (British Petroleum, 2016).

  25. 25.

    Kydland, F. E. & Prescott, E. C. Rules rather than discretion: the inconsistency of optimal plans. J. Polit. Econ. 85, 473–491 (1977).

    Article  Google Scholar 

  26. 26.

    Brunner, S., Flachsland, C. & Marschinski, R. Credible commitment in carbon policy. Clim. Policy 12, 255–271 (2012).

    Article  Google Scholar 

  27. 27.

    Mertens, K. & Ravn, M. O. Measuring the impact of fiscal policy in the face of anticipation: a structural VAR approach. Econ. J. 120, 393–413 (2010).

    Article  Google Scholar 

  28. 28.

    Blyth, W. et al. Investment risks under uncertain climate change policy. Energy Policy 35, 5766–5773 (2007).

    Article  Google Scholar 

  29. 29.

    Böhringer, C., Balistreri, E. J. & Rutherford, T. F. The role of border carbon adjustment in unilateral climate policy: overview of an energy modeling forum study (EMF 29). Energy Econ. 34, S97–S110 (2012).

    Article  Google Scholar 

  30. 30.

    Global Emissions EDGAR v.4.2. (EDGAR, 2011) http://edgar.jrc.ec.europa.eu/overview.php?v=42 Accessed 25 Jan 2013.

  31. 31.

    Luderer, G. et al. Deep Decarbonization Towards 1.5 °C – 2 °C Stabilisation (Potsdam Institute for Climate Impact Research, Potsdam, Germany, 2016).

  32. 32.

    Leonard, D & Van Long, N. Optimal Control Theory and Static Optimization in Economics. (Cambridge Univ. Press, Cambridge, 1992).

    Google Scholar 

  33. 33.

    Varian, H. Microeconomic Analysis. (W. W. Norton, New York, 1992).

    Google Scholar 

  34. 34.

    Sinn, H.-W. Capital Income Taxation and Resource Allocation. (North Holland, London, 1987).

    Google Scholar 

  35. 35.

    Gerlagh, R. Too much oil. CESifo Econ. Stud. 57, 79–102 (2011).

    Article  Google Scholar 

  36. 36.

    Bauer, N. et al. Shared socio-economic pathways of the energy sector—quantifying the narratives. Glob. Environ. Chang. 42, 316–330 (2017).

    Article  Google Scholar 

  37. 37.

    Hoel, M. & Jensen, S. Cutting costs of catching carbon—Intertemporal effects under imperfect climate policy. Resour. Energy Econ. 34, 680–695 (2012).

    Article  Google Scholar 

  38. 38.

    Colgan, J. D. The emperor has no clothes: the limits of OPEC in the global oil market. Int. Organ. 68, 599–632 (2014).

    Article  Google Scholar 

  39. 39.

    Loderer, C. A test of the OPEC cartel hypothesis: 1974–1983. J. Financ. 40, 991–1006 (1985).

    Article  Google Scholar 

  40. 40.

    Brémond, V., Hache, E. & Mignon, V. Does OPEC still exist as a cartel? An empirical investigation. Energy Econ. 34, 125–131 (2012).

    Article  Google Scholar 

  41. 41.

    Cairns, R. D. The green paradox of the economics of exhaustible resources. Energy Policy 65, 78–85 (2014).

    Article  Google Scholar 

  42. 42.

    Österle, I. The green paradox and the importance of endogenous resource exploration. Aust. J. Agric. Resour. Econ. 60, 60–78 (2016).

    Article  Google Scholar 

  43. 43.

    Bauer, N. et al. Assessing global fossil fuel availability in a scenario framework. Energy 111, 580–592 (2016).

    Article  Google Scholar 

  44. 44.

    Hoel, M. Is there a Green Paradox? CESifo Working Paper No. 3168 http://econpapers.repec.org/paper/cesceswps/_5f3168.htm Accessed 7 Jan 2014.

  45. 45.

    van der Ploeg, F. Cumulative carbon emissions and the green paradox. Annu. Rev. Resour. Econ. 5, 281–300 (2013).

    Article  Google Scholar 

  46. 46.

    Michielsen, T. O. Brown backstops versus the green paradox. J. Environ. Econ. Manag. 68, 87–110 (2014).

    Article  Google Scholar 

  47. 47.

    van der Ploeg, F. & Withagen, C. Is there really a green paradox? J. Environ. Econ. Manag. 64, 342–363 (2012).

    Article  Google Scholar 

  48. 48.

    Venables, A. J. Depletion and development: natural resource supply with endogenous field opening. J. Assoc. Environ. Resour. Econ. 1, 313–336 (2014).

    Google Scholar 

  49. 49.

    Hoel, M. in Climate Change and Common Sense: Essays in Honor of Tom Schelling Ch. 11 (Oxford Univ. Press, Oxford, 2012).

  50. 50.

    Rezai, A. & van der Ploeg, F. Second-best renewable subsidies to de-carbonize the economy: commitment and the green paradox. Environ. Resour. Econ. 66, 409–434 (2017).

    Article  Google Scholar 

Download references

Acknowledgements

The authors thank O. Edenhofer, G. Klepper, K. Pittel and R. van der Ploeg for fruitful discussions. N.B. and J.H. were supported by funding from the German Federal Ministry of Education and Research (BMBF) in the Call `Economics of Climate Change' (funding code 01LA11020B, Green Paradox). The research of C.M. and P.E. forms part of the programme of the UK Energy Research Centre and was supported by the UK Research Councils under Natural Environment Research Council award NE/G007748/1.

Author information

Affiliations

Authors

Contributions

N.B. and C.M. contributed equally to this research. N.B., C.M. and J.H. set up the research design. J.H. provided data for REMIND and C.M. provided data for TIAM-UCL. N.B. analysed data. N.B. and C.M. wrote the draft of the paper. J.H. and P.E. commented on the draft.

Corresponding author

Correspondence to Nico Bauer.

Ethics declarations

Competing financial interests

The authors declare no competing financial interests.

Additional information

Publisher’s note: Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary information

Supplementary Information

Supplementary Notes 1–6, Supplementary References, Supplementary Figures 1–18 and Supplementary Table 1–2

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Bauer, N., McGlade, C., Hilaire, J. et al. Divestment prevails over the green paradox when anticipating strong future climate policies. Nature Clim Change 8, 130–134 (2018). https://doi.org/10.1038/s41558-017-0053-1

Download citation

Further reading