The Green Paradox

The colour ‘green’ has a multitude of connotations running with it and is associated with the meanings of growth, freshness, fertility, and the environment. It is also commonly used to represent nature. In the discipline of economics, the term ‘nature’ indicates the gargantuan cluster of resources that it provides, and not the spiritual or primordial aspects associated with it.

The tenability of an economy can be deciphered by ascertaining the number of natural resources it wields. Thus, safeguarding the environment and its resources has been one of the most imperative concerns of economists and planners across the globe. The standard way by which an economy tries to accomplish it is through government intervention. The authorities try to strike a balance between effective utilisation and adequate cushioning of its scarce resources. Almost every government in an economy with abounding resources introduces legislative provisions with the intent of achieving this balance. Thus, policies or acts of legislation, passed with such or similar intent, are known as green policies.

On a side note, it is impossible to conceive the idea of an economy devoid of human wants, as it is one of its salient features and is the catalyst that drives it. An interesting attribute of human wants is that they are unbiased of any moral/legal presumption associated with them. This is what shapes a consumer to be rational. However, with the popularity of the concept of social cost on the uprise, one cannot help but notice the toll that rationality takes on the resources. The interlinkage of every entity in an economy with the other, the behaviour they display in certain situations as predicted by the economic principles, and the deviations/alterations in such predictions by the dynamic external forces and circumstances sometimes cause these principles to fail. This gives rise to a paradoxical situation, characterised by the display of discrepancy in behaviour by these principals/constants. On connecting the dots, it can be observed that the unpredictability of the human psyche, tinted with negotiable morality, exposes certain chinks and loopholes in the policies introduced by the authorities. This sometimes leads to a display of contrary results, and subsequent failure of such policies.

One of the best examples of this would be green policies, as they display paradoxical tendency in the long run. The main rationale responsible is the resistance of human wants to such restrictive measures. The level of pollution/environmental degradation is measured by the bulk of pollutant particles accumulated in a specific environmental sample. One of the primary contributors to such pollutants is fossil fuels. The social cost incurred on account of the consumption of fossil fuel is the corrosion of the environment. Every molecule of the fuel extracted, upon combustion, would contribute to the addition of carbon to the atmosphere. Even on employing the most efficient methods, the emission cannot be curbed significantly, as a quarter of the emitted carbon would dwell in the atmosphere practically forever, thereby contributing to global warming. As a result, the authorities are backed into a corner, and forced to choose the restrictive use policy as a last resort.

Moreover, the government cannot make restrictions unannounced. The general rule is that it is obligated to make a reasonably prior notification to the resource owners. The resource owners anticipate the prices to fall in the future, as the clogging of permitted extraction and use of these resources causes the long-run demand to decrease. Thus, the utility of these resources as assets falls for their owners, as they would not enjoy any future appreciation from them. This induces them to intensify the extraction in the current period when the restrictions are not yet active and the demand is still fair. Then, they divest by selling off the stock of the extracted resources and reinvest the proceeds into something with better prospects of future appreciation. This renders the policy useless, as the share of resources that are to be used judicially in the future is squandered in the current period. The human instinct of self-preservation causes the entire policy framework to collapse. Such a situation is called the ‘green paradox’.

The term was first coined by the German economist, Hans-Werner Sinn, and has since become one of the most controversial topics under environmental economics. The green paradox is rooted in the fundamental argument of Hotelling’s rule- which states that for the owners of non-renewable resources, time acts as the deciding factor for the extraction of the resources they possess. Because of their scarce nature, non-renewable resources will always command a price that is higher than the cost of their extraction. The owner ends up at a crossroads between keeping the resource intact in the hope of a better price in the future, or extracting and selling it to invest the proceeds in higher-yielding security. Hence, for the paradox to operate, obedience to the Hotelling’s rule is a prerequisite.

Amidst all the scepticism, there have been several accounts of empirical evidence in full or partial support of the rule and paradox. When the carbon cap bill was introduced in the US senate in 2010, the expectation of a possible demand shortage had started to induce excessive extractions in the current period. Till the time the bill collapsed, a 12 million ton increase in the normal CO2 emission rate was observed. Also, the price of oil and coal for the future contracts that expired before the imposition of the cap showed a significant rise. However, the evidence from the US Acid Rain Project states that though the prices were driven down as a result of the paradox, there was no material increase in the persisting rate of coal extraction. This goes to show that due to a large number of factors, the predicted outcomes seldom fully confirm the theoretically suggested outcomes. Moreover, the reliance of the outcome on the sentiment of the suppliers also creates a lot of room for deviations. Though only a portion of the entire phenomenon can be observed in a given sample, it is still safe to say that the fundamental premises of the argument hold when subjected to the practical aspect of the markets.

The greatest challenge for economists and policymakers is to develop a climate policy in which the paradox and the variation in its significance at the national and global level is accounted for, and which also reduces the overall extraction of these resources rather than restricting their usage. A good point to start would be to develop an effective formula/algorithm to update and revamp the allocation of the global carbon budget to different countries, using an effective evaluation system to calculate the weightage of the dynamic political and economic factors.


Aryaman Dhiman

I am an undergraduate student at Shri Ram College of Commerce. Over the years, my interests have jumped ship between art, theater, and sports, but my love for religious and historical research remains unchanged.

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