Template-Type: ReDIF-Paper 1.0

Author-Name: Alexander Reentovich
Author-Email: ReentovichAA@cbr.ru
Author-Workplace-Name: Bank of Russia, Russian Federation

Title: Uncertain technical change, Bayesian learning and the Green Paradox

Abstract: The phenomenon of the ‘Green Paradox’ has been widely discussed in the climate economics literature for 
the last 15 years. The term refers to a situation in which a well-intended climate policy leads to adverse results, 
such as arise in greenhouse gas emissions. The emergence of the paradox is usually attributed to the exhaustibility of 
fossil fuels: firms extracting these resources seek to equalise the present value of resource rents in each time period, 
so, anticipating future tax increases, they increase current production. On the other hand, if the productivity growth 
in the green sectors is driven by learning-by-doing, the Green Paradox does not emerge. In this paper, I show that 
the Green Paradox may arise as a consequence of an ex ante optimal policy in the absence of exhaustible resources 
if technological change in the clean sector is subject to uncertainty. That is, if the true speed of technological 
progress is an unknown parameter, economic agents have to form their expectations regarding future technological 
development with the help of Bayes’ rule and make their decisions accordingly. If the market expects (a priori) the 
demand for dirty capital to shrink more rapidly due to technological progress than policy makers do, the latter must 
cut carbon taxes or even subsidize investment in dirty capital to avoid underinvestment in this type of capital and, 
consequently, the underproduction of energy in the present. If the flow of subsidies is persistent enough, CO2 emissions 
may rise.

Length: 35 pages
Creation-Date: 2024-08
Revision-Date:
Publication-Status:
File-URL: https://www.cbr.ru/StaticHtml/File/165449/wp_133.pdf
File-Format: Application/pdf
File-Function:
Number: wps133
Classification-JEL: D81, D83, D84,Q54, Q55, Q58
Keywords: Climate change, Bayesian learning, Green Paradox, Learning-by-doing, heterogeneous beliefs.
Handle:RePEc:bkr:wpaper: wps133