Macroeconomic perspectives on the green paradox

The thesis employs three macroeconomic perspectives on the green paradox. We illustrate how green choices may not lead to green outcomes, such as imperfect climate policy design of reducing global emissions. We bridge a gap between environmental economics on the green paradox with various macroeconomic and energy literatures – from oil market structure and the resource curse to trade gravity models. We apply various macroeconometric methods to explore whether a green paradox effect exists at three macro levels: OPEC and non-OPEC oil market level, Saudi Arabia and the USA country level, and G7-China trade case study. Using a simultaneous equation framework over the period 1976 to 2015, we provide innovative comparative frameworks to explore oil production strategies in response to green regulations – from the global oil market to autocratic and private producers under democratic regimes. Forward looking oil producers are expected to increase production in response to the rise of alternative energy – green paradox effect. The thesis also constructed a green policy index to explore the extent to which China is a pollution haven for the G7 economies over the period 1994 to 2014. The three macroeconomic perspectives allow us to broaden the understanding of the green paradox to examine the role of asymmetric incentives across and within countries in response to the rise of green regulations. The results show that OPEC and Saudi Arabian production strategies are more influenced by institutional drivers rather than market conditions. Cartel based incentives rather than green regulations occurring in the eighties have a positive impact on OPEC oil production. When we go deeper at the country level, we find a negative impact of green regulations on Saudi Arabian oil production, contrary to the green paradox theoretical prediction. Saudi Arabia seems incentivised to ensure political cohesion through adopting a procyclical fiscal policy. A US regulator rather channels surplus towards individuals to gain popularity and get re-elected. In other words, we find that institutions with healthier budget balance behaviour generate oil production strategies of higher economic payoff – a profit maximising behaviour. This explains why we find a positive impact of green regulations on oil production growth for non-OPEC oil producers – in aggregate and the US case in specific. The results therefore challenge conventional wisdom of the green paradox that neglects the role played by institutional variations across different oil producers. We also find partial evidence where China is a pollution haven for the G7 trading partners. A positive impact of 2 economic incentives, including GDP and China’s WTO membership, on imports from China hold robust across various estimation outcomes. However, regulatory incentives, including green policy strictness, are mostly statistically significant in the cointegration context only. The implication is that there exists a structural relationship between G7’s green regulations and higher imports causing a pollution haven pattern of trade between them in the long run. The thesis provides a rationale behind the failure to reduce global emission based on the behaviour of energy and trade regulators over the past few decades. We show that different oil producers behave differently across different institutions and G7 economies become greener at the expense of increasing imports from China over long run horizons. It is important therefore to account for the role of institutions when analysing economic outcomes with respect to oil production and international trade activities over time