Tuesday, March 30, 2010

The green paradox

The fear that oil is running out has been replaced by the fear that oil will pollute the life on earth out of existence. In both cases, the countermeasure is to find alternative sources of energy. This alleviates the first fear as it allows to stretch the use of oil over a longer period, one would hope. But what about the second fear?

Reyer Gerlagh makes the observation that things could take a turn for the worse. Indeed, if there is a sufficiently high probability that oil will be replaced by some alternative energy sources in the future, then current suppliers of oil have every incentive to dump all their supply on the market now. Oil consumption would dramatically increase and the pollution problem worsens. The solution, once again, is to tax oil to counter this effect. Americans, this is how you should be financing your health care reform.

1 comment:

Reyer Gerlagh said...

Thanks for your reference. I hope the readers click and read the paper itself. My paper is in a small but important way different from what the blog suggests. I argue that alternative energy will not replace 'cheap' oil (because OPEC oil is too cheap to produce). But what we must do to save the planet is make sure that we do not go along the route of 'unconventional oil' and liquefied coal. Alternative energy is essential for this. The green paradox should not stop us investing in ‘clean’ energy sources.

The paper is forthcoming in CESifo Economic Studies.

Reyer Gerlagh