Unilateral climate policy and the green paradox: Extraction costs matter

I analyze the effect of unilateral climate policies in a two-country model where fossil fuel extraction costs depend on both current extraction and remaining stock and where a constant marginal-cost clean substitute is available. An intensification of climate policy in the country with an initially stricter policy does not increase early fossil fuel extraction (i.e., there is no “weak green paradox”) or the present value of pollution costs (i.e., there is no “strong green paradox”) if energy demand in that country is initially met with a mix of fossil fuel and a substitute. Whether a stricter climate policy in the country with an initially laxer policy causes a weak green paradox depends on the price elasticity of energy demand and the strength of the flow and stock dependence of extraction costs. If the reduction of total extraction is sufficiently strong, it overcompensates for a weak green paradox with respect to pollution costs. Thus, a weak green paradox does not necessarily imply a strong green paradox, due to stock dependence.