It’s Not Easy Going Green: The Green Paradox
Faced with reducing reliance on fossil fuels, a 'Green Paradox’ emerges, created by companies racing to cash in before governments enact policies regulating pollution.
From Kyoto to London
Long before the UN’s Climate Change Conference of the Parties (COP) meetings gained global recognition, the Kyoto Protocol was signed into international law in 1997 after 84 countries ratified the treaty. They recognized the need to cut carbon dioxide (CO2) emissions because they get trapped in the atmosphere, causing the Earth’s temperature to rise, resulting in a ‘greenhouse’ effect. Fast forward to the 28th meeting of the COP in December 2023, where governments are now panic-stricken because humans have so miserably failed to abate—let alone achieve—any of the previous policy goals. The level of concern is so high that every country in the world—yes, every country—agreed to commit to the proposed ‘global stocktake’, the first unanimous decision to transition away from fossil fuels.
Apparent by the almost 30-year gap between acknowledging the need to decrease CO2 emissions and unanimously agreeing that something needs to happen ‘for real’ this time, countries struggled to implement emissions regulations. (Note, other emissions are bad and need to be regulated, like sulfur dioxide, but CO2 gets all the attention.) It took the E.U. until 2004 to introduce its Emissions Trading System (ETS), followed by the U.S.’s attempt—and failure in 2010—to pass the Waxman-Markey Climate Bill. As yet, China hasn’t fared any better with its most recent Five-Year Plan.
Capitalism 101
From a capitalist perspective, it makes complete sense: Sell now or possibly lose out later. When governments threatened environmental regulations, fossil fuel producers—oil and gas and coal companies—responded by ramping up extraction. From a supply and demand perspective, this expediency could result in less profit per unit, depending on other geopolitical factors. Companies, however, deemed this risk worthwhile when facing future regulatory possibilities.
I understand how the global political economy works. And yet, I was recently on a sustainability discussion board with a chemical engineer in the petroleum industry who asked an expert in the renewable energy field about this exact issue: How does the futures contracts market for petroleum potentially impact renewable energy resource projects? After reading the exchange, I was reminded of just how blinded I can be by my idealism. Even though I know how capitalism works, I still expect businesses to act responsibly. Maddening!
Corporations cannot survive if they are not competitive—just ask CEO Lee M. Tillman of Marathon Oil how he’s feeling about ConocoPhillips taking over his company in the latest energy megamerger. So, of course, it makes sense that these companies will exploit whatever resources they can to satisfy their shareholders. They’re only doing what every other petroleum company is doing. Until firm regulations are in place, to remain competitive, they don’t have the luxury of being environmentally conscientious. Even when they face a public relations nightmare (the Deepwater Horizon BP Gulf of Mexico oil spill makes the Exxon Valdez disaster look like a drop of oil in the ocean) these companies make overtures toward being environmentally responsible (like BP’s Beyond Petroleum campaign), but the reality of the industry is that they can only invest so much before they jeopardize putting themselves out of business.
The Green Paradox
Around the same time that I was reminded of my idealist Achilles tendon, Michael (my Sustainable Planet co-host and spouse) coincidentally sent me an article about ‘The Green Paradox’. Admittedly, I was not familiar with this term, though I was quite familiar with the concept, as it described the discussion board exchange. Overcoming whatever blind spot he may have had about how the world should work, economist Hans Werner-Sinn examined fossil fuel companies’ reactions to the objectives laid out in the Kyoto Protocol. In his 2008 article “Public Policies against Global Warming: A Supply-Side Approach”, as indicated by the title, he argued that countries failed to adequately consider how fossil fuel companies would respond to a treaty that threatened the future of their industry. Sinn demonstrated that the Kyoto Accord had created conditions for what he called a ‘Green Paradox’, whereby producers raced to extract as many fossil fuels as possible before regulations went into effect. He further developed ideas in his subsequent book, The Green Paradox (2012).
This Green Paradox has held up in numerous subsequent rigorous studies. One of the earliest focused on the U.S. coal industry. Lemoine (2017) examined the impact of the Waxman-Markey Climate Bill, proposed in 2009. He found that attempts to cut back coal usage led to increased storehouses, increased futures market profits, and increased emissions of 12 million tons leading up to April 2010, the time of the US Senate’s bill debate. When attempting to reduce greenhouse gas emissions, Lemoine also found a parallel rise in liquid natural gas (LNG) prices which can be used as a coal substitute in electricity production and produces fewer emissions per unit of energy than coal.
Subsequent studies also confirmed Sinn’s Green Paradox theory. A study by Gerlagh, et al, (2021) revealed that abatement policies, like the Market Stability Reserve component in the EU’s revised ETS, led to an increase in carbon emissions. Similarly, a 2022 study examining market reactions to China’s 14th 5-Year Plan goal to reach its carbon peak levels by 2030 and be carbon neutral by 2060 found that companies tried to game the system before tougher regulations went into effect, particularly for the coal industry. Most recently, researching petroleum companies’ response to the 2009-2010 Waxman-Markey Climate Bill, Norman and Schlenker found in their 2024 study that, in considering media salience and two court rulings, the Green Paradox held.
Research on the gap between a proposed policy and when it takes effect consistently confirmed Sinn’s hypothesis that restricting the future use of fossil fuels accelerated current consumption. And yet, my idealist heart beat a bit faster when I came across a counter-finding. In a 2020 study, researchers examined the effect of the EU’s ETS and found that, despite depressing prices in the carbon market, carbon emissions decreased. Sparing the world of what might seem to be a meager amount of 3.8% additional output, that amount was roughly the equivalent of one-half of what the EU countries needed to reduce under the Kyoto Protocol. This outlier arguably deserves more attention, but that’s for someone’s doctoral dissertation, not my Substack post.
Other Sectors
As studies confirmed that the Green Paradox held in the fossil fuel industry, the theory gained traction in other fields; the paradox appears in other sectors affected by climate change policy. It’s not surprising. Governments committed to international policies have compelling reasons to comply, whether it’s reputation, peer pressure, or fear of financial repercussions. But, as the Green Paradox highlights, the gap between announcing the policy and enforcing it encourages companies to cash in while they can.
Alternative energy industries respond to the call to reduce carbon emissions, willing to fill in the energy gap. (Some of those companies are the same ones in the fossil fuel game now. Check out our podcast episode for more on this.) Hydrogen is one potential fuel source. But there are different types of carbon (blue, green, grey, dirty, and some I’m sure I’m missing) and a lot of work to be done to make it a clean energy source. The U.S. and E.U. are banking on it as an alternative fuel source, having committed a bundle of money—to the tune of $1 trillion—on research and development. The E.U. aims to produce 10 million tons of renewable hydrogen by 2030. As soon as the U.S. Inflation Reduction Act passed in 2022, which included a subsidy for hydrogen production, fossil fuels companies re-panicked, but were also aware of the plethora of infrastructure and delivery issues associated with hydrogen.
Another problem is how adjacent industries respond to the need for renewable energy products. I remember reading about how the increased demand for wind energy expedited the deforestation of balsa wood in Ecuador: two seemingly unconnected things. What we see are big metal behemoths. In reality, wind turbines need lightweight inner-core materials. In this regard, companies need energy to run their [fill in the blank] industry, so they scramble to find ways to lower their carbon emissions. Wind is one alternative, so companies scramble to more competitively produce cheaper turbines which, in this case, contributed to deforestation. As a result, fewer trees equals less carbon being sequestered, creating a paradox whereby the attempt to decrease carbon emissions in the long run increases current output.
What to Do?
Policy implementation is a tricky business because there are so many interested parties, moving parts, and unforeseeable variables. It’s akin to a game of Whac-A-Mole, where trying to solve one problem causes others to pop up in unexpected places. Cities, like Denver, attempt to increase green space but end up displacing residents in the process. Costa Rica relies on almost 100 percent green energy but struggles to move beyond exploitative farming of palm oil, pineapple, and coffee, as I discovered when visiting.
The reality is that countries need to make trade-offs and can only do so much at any given time. This recent trade assessment argues that U.S. and E.U. efforts to protect their domestic auto industries from Chinese electric vehicles (EVs) lead to a ‘paradox of green transition’. Lacking coordinated global policies that encourage cooperation in the EV market, individual governments shelter their own less competitive domestic industries from foreign competition, while simultaneously knowing they should be encouraging the move to EVs to help reduce carbon emissions. Herein lie the daily struggles to get greener. It’s not a whole lot different from me trying to buy ethically sourced products but needing to stick within a reasonable budget.
The Kyoto Protocol intended a gradual shift toward alternative fuel sources, but the corporations realized they needed to cash in early or lose out later, so they ramped up extraction. Sinn recommended that to be effective, governments needed to include policies that would ease the transition for businesses to avoid a race to extract. Countries face the dual challenge of working together to address climate change issues while, at minimal, satisficing their businesses and constituents at home. We’ll see where we stand at the next COP meeting.