Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: This paper demonstrates that unintended effects of climate policies (Green Paradox effects) also arise in general equilibrium when countries compete for mobile factors of production (capital and resources/energy). Second, it shows that countries have a rationale to use strictly positive source-based capital taxes to slow down resource extraction. Notably, this result comes about in the absence of any revenue requirements by the government, and independently of the elasticity of substitution between capital and resources in production. Third, the paper generalizes the results obtained by Eichner and Runkel (2012) by showing that the Nash equilibrium entails inefficiently high pollution.

Keywords: Green Paradox; factor mobility; interjurisdictional competition; resource extraction; substitutability between capital and resources; capital taxation

JEL-codes: E22; H23; H77; Q31; Q58

37 pages, June 2016

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