Should we be worried about the green paradox? Announcement effects of the Acid Rain Program

Corrado Di Maria, Ian Lange, Edwin van der Werf

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44 Citations (Scopus)


This paper presents the first empirical test of the green paradox hypothesis, according to which well-intended but imperfectly implemented environmental policies may lead to detrimental outcomes due to supply side responses. We use the introduction of the Acid Rain Program in the U.S. as a case study. The theory predicts that owners of coal deposits, expecting future sales to decline, would supply more of their resource between the announcement of the Acid Rain Program and its implementation; moreover, the incentive to increase supply would be stronger for owners of high-sulfur coal. This would, all else equal, induce an increase in sulfur dioxide emissions. Using data on prices, heat input and sulfur content of coal delivered to U.S. power plants, we find strong evidence of a price decrease and of an increase in the sulfur premium, some indication that the amount of coal used might have increased, and no evidence of fuel-switching towards higher-sulfur coal. Overall, our evidence suggests that while the mechanism indicated by the theory might be at work, market conditions and concurrent regulation largely prevented a green paradox from arising. These results have implications for the design of climate policies.
Original languageEnglish
Pages (from-to)143-162
JournalEuropean Economic Review
Early online date18 Apr 2013
Publication statusPublished - Jul 2014


  • Green paradox
  • Implementation lags
  • Announcement effects
  • Climate policy
  • Acid rain policy

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