eThesis - Kauppakorkeakoulun sähköiset gradut

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Climate change has induced economists to extend traditional Hotelling frameworks to study the effects of carbon taxes on the resource extraction path of carbon resource and derive crucial policy implications. Of particular relevance to the literature of economics of climate change is Sinn(2008) who introduces the green paradox as a possible outcome of climate policies today. As resource owners are confronted with in time increasing carbon taxes, and as owners include rising taxes into their maximization problem, the result is rather a faster than a slower extraction of the fossil fuel resource. That is because an in time rising tax imposes a threat on future profits of extraction, and the resource owner will come to the logical conclusion that shifting extraction to the presence increases his expected total revenues.

Accordingly, the main purpose of this thesis is to uncover whether we should focus on subsidizing renewal energy resources such as solar energy and wind power, or will that only result in increased fossil fuel extraction and emissions.In other words, the goal is to reveal whether the green paradox exists as Sinn(2008) claims.