WARM GLOBE, “WARMER” POLICIES: AN EMPIRICAL TEST OF THE GREEN PARADOX HYPOTHESIS

Abstract

We study the effect of an ethanol expansion on carbon emissions using Brazilian energy data from 1981 to 2018. We find that greater ethanol production provides a perverse incentive for Brazilian oil producers to increase their rate of oil extraction. We report that following a cubic meter rise in the one period lagged change in Brazil’s ethanol production, change in oil extraction increases between 0.53 m3 to 0.64 m3 in the current period, a weak green paradox. These estimates translate into short-run and long-run elasticities of 1.5 and 4.9 respectively, implying that a one percent rise in the change in ethanol production now would increase change in oil production by 1.5 percent in the short-run and 4.9 percent in the long-run. Also, net CO2 emission in Brazil is positive if the reduction in CO2 emission as a result of substituting ethanol for oil on a one-for-one basis is less than 73 percent in the short run and 244 percent in the long run, thus, evidence for a strong green paradox. The results indicate that Brazil’s well-intended ethanol policy may have resulted in detrimental outcomes that go against the objectives of the policy. We recommend that, at the very least, Brazil and other policymakers should critically evaluate a single policy such as an ethanol subsidy used in isolation to ascertain whether or not their implementations have the potential of increasing fossil fuel extraction and ultimately increasing CO2 emissions now or in the future.