Working Papers

A classroom model of global warming, fossil fuel depletion and the optimal carbon tax is formulated and calibrated. It features iso-elastic fossil fuel demand, stock-dependent fossil fuel extraction costs, an exogenous interest rate and no decay of the atmospheric stock of carbon. The optimal carbon tax reduces emissions from burning fossil fuel, both in the short and medium run. Furthermore, it brings forward the date that renewables take over from fossil fuel and encourages the market to keep more fossil fuel locked up. A renewables subsidy induces faster fossil fuel extraction and thus accelerates global warming during the fossil fuel phase, but brings forward the carbon-free era, locks up more fossil fuel reserves and thus ultimately curbs cumulative carbon emissions and global warming. For relatively large subsidies social welfare is more likely to fall as the economic costs rises more than proportionally with the size of the subsidy. Our calibration suggests that such subsidies are not a good second-best climate policy.

JEL Codes: D81, H20, Q31, Q38

Keywords: global warming, social cost of carbon, optimal carbon tax, renewables

Reference: 119

Individual View

This article examines the possible adverse effects of well-intended climate policies. A weak Green Paradox arises if the announcement of a future carbon tax or a sufficiently fast rising carbon tax encourages fossil fuel owners to extract reserves more aggressively, thus exacerbating global warming. We argue that such policies may also encourage more fossil fuel to be locked in the crust of the earth, which can offset the adverse effects of the weak Green Paradox. We show that a subsidy on clean renewables has similar weak Green Paradox effects. Green welfare (the complement of environmental damages) drops (i.e., the strong Green Paradox) if the beneficial climate effects of locking up more fossil fuel do not outweigh the short-run weak Green Paradox effects. Neither the weak nor the strong Green Paradox occurs for the first-best Pigouvian carbon tax. We also pay attention to dirty backstops, spatial carbon leakage and green innovation.

JEL Codes: D81, H20, Q31, Q38

Keywords: fossil fuel, renewables, coal, economic growth, global warming, carbon tax, Green Paradox

Reference: 116

Individual View

Authors: Sambit Bhattacharyya, Jeffrey G Williamson

Jul 2013

This paper studies the distributional impact of commodity price shocks over the both the short and very long run. Using a GARCH model, we find that Australia experienced more volatility than many commodity exporting developing countries over the periods 1865-1940 and 1960-2007. A single equation error correction model suggests that commodity price shocks increase the income share of the top 1, 0.05, and 0.01 percents in the short run. The very top end of the income distribution benefits from commodity booms disproportionately more than the rest of the society. The short run effect is mainly driven by wool and mining and not agricultural commodities. A sustained increase in the price of renewables (wool) reduces inequality whreas the same for non-renewable resources (minerals) increases inequality. We expect that the initial distribution of land and mineral resources explains the asymmetric result.

JEL Codes: F14, F43, N17, O13

Keywords: commodity price shocks; commodity exporters; top incomes; inequality

Reference: 117

Individual View

The optimal reaction to a climate tipping point which becomes more imminent with global warming is to be precautionary in accumulating additional capital to curb the adverse effects of the calamity and to price carbon to make catastrophic change less imminent. However, if the mean lag for impact of the catastrophe is long enough, the additional saving response will be smaller and can turn negative. We also decompose the optimal carbon price into its catastrophe components and a conventional marginal damages component, and show the separate effects of relative intergenerational inequality aversion and relative risk aversion using Duffie-Epstein preferences. Focusing on a productivity catastrophe, we calibrate our model and show how sensitive the policy responses are to the degrees of intergenerational inequality aversion and risk aversion, the trend rate of economic growth, the hazard rates, and how long it takes for the catastrophe to have its full impact.

JEL Codes: D81, H20, O40, Q31, Q38

Keywords: gradual climate tipping point, precautionary saving, optimal social cost of carbon, trend growth, Duffie-Epstein preferences, speed of impact, hazard functions

Reference: 118

Individual View

Authors: Jacobus Cilliers

Jun 2013

In this paper, I develop a general equilibrium model of violence to explain observed variation in coercive practices in conict zones. Armed groups own land in the resource sector and allocate military resources between conflict and coercion, which assigns defacto ownership over land and labour respectively. If find that coercion is higher if labour is scare relative to land, if production is labour-intensive, or if one group is dominant relative to others. Furthermore, the impact of the price of the commodity depends on the distribution of military strength: coercion increases with price if one group is dominant, but this effect is potentially reversed if military power is highly decentralised. These results are consistent with historic cases of the rise in serfdom in 16th century Russia, different coercive regimes in the rubber plantations in Amazonia and the Congo Free State 19th century, and also variation in coercion during the Sierra Leonean Civil War and in the eastern provinces of the Democratic Republic of Congo. Results of the model have implications for both trade and military policy. Trade policy aimed at reducing domestic commodity prices could actually lead to an increase in coercion. Similarly, a cease-fire agreement between armed groups can be interpreted as a form of collusion, as military resources are redirected from conflict to coercion.

JEL Codes: D21, D23, D24, D41, D74, N37, N47, N57, Q34

Keywords: conflict, coercion, slavery, natural resources

Reference: 113

Individual View

Authors: Andreas Kotsadam, Anja Tolonen

Jun 2013

We use the rapid expansion of mining in Sub-Saharan Africa to analyse local structural shifts and the role of gender. We match 109 openings and 84 closings of industrial mines to survey data for 800,000 individuals and exploit the spatial-temporal variation. With mine opening, women living within 20 km of a mine switch from self-employment in agriculture to working in services or they leave the work force. Men switch from agriculture to skilled manual labor. Effects are stronger in years of high world prices. Mining creates local boom-bust economies in Africa, with permanent effects on women’s labor market participation.

JEL Codes: J16, J21, O13, O18

Reference: 114

Individual View

Authors: David von Below, Pierre-Louis Vezina

Jun 2013

This paper examines the trade and trade-induced welfare effects of high oil prices.  Using a gravity model of trade we find that the distance elasticity of trade significantly increases with the oil price. This suggests that high oil prices make trade less global. We estimate that an increase in the oil price from 100$ to 200$ would have the similar effect as imposing a world-wide import tariff between 4% and 9%, depending on the distance between countries. In turn, such higher trade costs would lower welfare by 1.8% in the average non-oil-exporting country.

JEL Codes: F14, Q43

Keywords: oil prices, gravity, trade costs

Reference: 115

Individual View

Authors: Sweder van Wijnbergen, Tim Willems

May 2013

Climate skeptics typically argue that the possibility that global warming is exogenous, implies that we should not take additional action towards reducing emissions until we know what drives warming. This paper however shows that even climate skeptics have an incentive to reduce emissions: such a directional change generates information on the causes of global warming. Since the optimal policy depends upon these causes, they are valuable to know. Although increasing emissions would also generate information, that option is inferior due its irreversibility. We show that optimality can even imply that climate skeptics should actually argue for lower emissions than believers.

JEL Codes: D83, Q54, Q58

Keywords: climate policy, global warming, climate skepticism, active learning,

Reference: 111

Individual View

Authors: Fidel Perez-Sebastian, Ohad Raveh

May 2013

Natural resource abundance is a blessing for some countries, but a curse for others. We show that differences across countries in the degree of fiscal decentralization can contribute to this divergent outcome. Using a large panel of countries, covering several decades and various fiscal decentralization and natural resource measures, we provide empirical support for the novel hypothesis. We also study a model that combines political and market mechanisms, under a unified framework, to illustrate how natural resource booms may create negative effects in fiscally decentralized nations.

JEL Codes: Q32, Q33, O13, O18, H77

Keywords: Natural resources, economic growth, …scal decentralization

Reference: 112

Individual View

We use the exogenous variation in oil prices to study the negative effect of income aspirations on households' satisfaction with income. To evaluate the effect we use data on reported satisfaction with income from Kazakhstan's Household Budget Survey - a

quarterly, unbalanced panel of households covering the period 2001-2005. Our results suggest that a 20% increase in the oil price decreased households' satisfaction with income by half a standard deviation within a year. We argue that the drop in satisfaction is due to peoples' inflated expectations. This result highlights the importance of managing expectations in a rapidly changing economic environment.

JEL Codes: Q33, Q34, I31, D03

Keywords: Resource Boom, Conflict, Aspirations, Income Satisfaction

Reference: 109

Individual View

The Green Paradox states that a gradually more ambitious climate policy such as a renewables subsidy or an anticipated carbon tax induces fossil fuel owners to extract more rapidly and accelerate global warming. However, if extraction becomes more costly as reserves are depleted, such policies also shorten the fossil fuel era, induce more fossil fuel to be left in the earth and thus curb cumulative carbon emissions. This is relevant as global warming depends primarily on cumulative emissions. There is no Green Paradox for a specific carbon tax that rises at less than the market rate of interest. Since this is the case for the growth of the optimal carbon tax, the Green Paradox is a temporary second-best phenomenon. There is also a Green Paradox if there is a chance of a breakthrough in renewables technology occurring at some random future date. However, there will also be less investment in opening up fossil fuel deposits and thus cumulative carbon emission will be curbed.

JEL Codes: D81, H20, Q31, Q38

Keywords: global warming, Green Paradox, carbon tax, renewables subsidy, second best, technological breakthrough

Reference: 110

Individual View

Authors: Thomas Michielsen

Mar 2013

Anticipated climate policies are ineffective when fossil fuel owners respond by shifting supply intertemporally (the green paradox). This mechanism relies crucially on the exhaustibility of fossil fuels. We analyze the effect of anticipated climate policies on emissions in a simple model with two fossil fuels: one scarce and dirty (e.g. oil), the other abundant and dirtier (e.g. coal). We derive conditions for a ’green orthodox’: anticipated climate policies may reduce current emissions. Calibrations suggest that intertemporal carbon leakage (from -22% to 13%) is a relatively minor concern.

Keywords: carbon tax, green paradox, exhaustible resource, backstop, climate change

Reference: 108

Individual View

Authors: Roberto Bonfatti, Steven Poelhekke

Mar 2013

Mine-related transport infrastructure specializes in connecting mines to the coast, and not so much to neighboring countries. This is most clearly seen in developing countries, whose transport infrastructure was originally designed to facilitate the export of natural resources in colonial times. We provide first econometric evidence that mine-to-coast transport infrastructure matters for the pattern of trade of developing countries, and can help explaining their low level of regional integration. The main idea is that, to the extent that it can be used not just to export natural resources but also to trade other commodities, this infrastructure may bias a country's structure of transport costs in favor of overseas trade, and to the detriment of regional trade. We investigate this potential bias in the context of a gravity model of trade. Our main findings are that coastal countries with more mines import less than average from their neighbors, and this effect is stronger when the mines are located in such a way that the related infrastructure has a stronger potential to affect trade costs. Consistently with the idea that this effect is due to mine-to-coast infrastructure, landlocked countries with more mines import less than average from their non-transit neighbors, but more then average from their transit neighbors. Furthermore, this effect is specific to mines and not to oil and gas fields, arguably because pipelines cannot possibly be used to trade other commodities. We discuss the potential welfare implications of our results, and relate these to the debate on the economic legacy of colonialism for developing countries.

JEL Codes: F14, F54, Q32, R4

Keywords: Mineral Resources, Transport Infrastructure, Regional Trade Integration

Reference: 107

Individual View

Authors: Elissaios Papyrakis, Ohad Raveh

Feb 2013

While there has been extensive research on the Dutch Disease (DD), very little attention, if any, has been devoted to the regional mechanisms through which it may manifest itself. This is the first empirical attempt to research a 'regional DD' by looking at the local and spatial impacts of resource windfalls across Canadian provinces and territories. We construct a new panel dataset to examine separately the key DD channels; namely, the Spending Effect (SE) and the Resource Movement Effect (RME). Our analysis reveals that the standard DD mechanisms are also relevant at the regional level; specifically, we find that: (a) Resource windfalls are associated with higher inflation and a labour (capital) shift from (to) non-primary tradable sectors. (b) Resource windfalls in neighbouring regions are associated with a capital (labour) shift from (to) non-primary tradable sectors in the source region. (c) The (spatial) DD explains (51%) 20% of the adverse effects of resource windfalls (in neighbouring regions) on region-specific non-mineral international exports (in the source region), and does not significantly affect domestic ones.

JEL Codes: F10, N92, O18

Keywords: Regional Dutch Disease, Inflation, Exports

Reference: 106

Individual View

Authors: Anthony Venables, Torfinn Harding

Jan 2013

Foreign exchange windfalls such as those from natural resource revenues change non-resource exports, imports, and the capital account. We study the balance between these responses and show that the response to $1 of resource revenue is, for our preferred estimates, to decrease non-resource exports by 74 cents and increase imports by 23 cents, implying a negligible effect on foreign saving. The negative per $1 impact on exports is larger for manufactures than for other sectors, and particularly large for internationally mobile manufacturing sectors. While standard Dutch disease analysis points to contraction of the tradable sector as a whole, division into non-resource exports and imports is important if, as suggested by much development literature, a higher share of exports to GDP is associated with faster growth. The large negative impact of resources on these exports points to the difficulty resource rich economies face in diversifying their exports.

JEL Codes: E21, E62, F43, H63, O11, Q33

Keywords: natural resources, Dutch disease, resource curse, trade, exports, imports

Reference: 103

Individual View

The paper studies the long-run effects of shocks to resource rents on the economy using a structural vector error correction model for 37 developing countries. First, the long-run relations involving resource rents and the economy differ for resource importers and exporters. Second, there is an indirect effect from resource rents to output through public capital accumulation for resource exporters. Third, although resource rents have a positive long-run impact on output, good public investment management is required for resource rents to improve non-resource output.

JEL Codes: O13; O43; Q32

Keywords: Resource rents; Resource exporters; PIMI

Reference: 105

Individual View

Authors: Charles F Mason

Jan 2013

As addressing climate change becomes a high priority it seems likely that there will be a surge in interest in deploying nuclear power. Other fuel bases are too dirty (coal), too expensive (oil, natural gas) or too speculative (solar, wind) to completely supply the energy needs of the global economy. To the extent that the global society does in fact choose to expand nuclear power there will be a need for additional production.  That increase in demand for nuclear power will inevitably lead to an increase in demand for uranium. While some of the increased demand for uranium will be satisfied by expanding production from existing deposits, there will undoubtedly be pressure to find and develop new deposits, perhaps quite rapidly. Looking forward, it is important that policies be put in place that encourage an optimal allocation of future resources towards exploration. In particular, I argue there is a valid concern that privately optimal levels of industrial activity will fail to fully capture all potential social gains; these sub-optimal exploration levels are linked to an departure between the private and social values of exploration information.

Reference: 104

Individual View

Authors: Ohad Raveh

Dec 2012

Do reduced costs of factor mobility mitigate Dutch Disease effects, to the extent that they are reversed? The case of federations provides an indication they do. We observe Resource Blessing effects at the federal-state level (within federations) yet rather

Resource Curse ones at the federal level (between federations), and argue the difference in outcomes stems from the difference in factor mobility costs. Through a two-region tax competition model we show that with sufficiently low factor mobility costs a resourceboom triggers an Alberta Effect –where resource abundant regions exploit the fiscal advantage, provided by resource rents, to compete more aggressively in the inter-regional competition over capital, and as a result attract vast amounts of capital– that mitigates, and possibly reverses, Dutch Disease symptoms, so that Resource Curse effects do not apply. Thus, this paper emphasizes the significance of the mitigating role of factor mobility in Dutch Disease theory, and presents a novel mechanism (Alberta Effect) through which this mitigation, and possible reversion, process occurs. The paper concludes with empirical evidence for the main implications of the model.

JEL Codes: O13, O18, O57, Q33

Keywords: Natural Resources, Factor Mobility, Dutch Disease, Resource Curse, Tax Competition

Reference: 100

Individual View

Authors: Roland Hodler

Dec 2012

The Arab Spring has led to very different outcomes across the Arab world. I present a highly stylized model of the Arab Spring to better understand these differences. In this model, dictators from the ethnic or religious majority group concede power if their country is oil-poor, but can stay in power by bribing the people if their country is oil-rich. Dictators from the minority group often rely on other members of their group to repress protests and to ght the majority group if necessary. These predictions are consistent with observed outcomes in Egypt, Libya, Saudi Arabia, Syria, Tunisia, and elsewhere.

JEL Codes: D72, D74

Keywords: Arab Spring, political transitions, repression, civil conflict, oil, divided societies

Reference: 101

Individual View

In this paper, I use an event study approach to investigate the claim that conflict minerals legislation in the United States (US) led to a ban on some mining exports from the Democratic Republic of the Congo (DRC), and that the passage of US regulation caused a ban on both production and trade by regulators in the DRC several months later. I also consider the assertion that conflict minerals legislation imposed severe costs for companies that report to the Securities and Exchange Commission in the US.

I find that returns for some companies traded on US stock exchanges were sensitive to changes in production in the DRC after the proposed legislation became law in the US. This either suggests that some financial market participants did not expect an immediate full embargo on newly-regulated Congolese mining and trading activities, or that market participants did not expect trade to be halted indefinitely. Reactions to a DRC-imposed ban on production were statistically significant; indicating that additional reductions in trade were not fully anticipated by financial market participants after regulations became law in the US.

I also find that among metal and gold mining companies traded on US exchanges, returns were abnormally high when conflict mineral legislation became more probable. Electronic communication manufacturing firms, which as a group were a target for many supporters of conflict mineral regulations, experienced no systematically abnormal returns corresponding to important dates in the US legislative process that I consider, but experienced abnormally positive returns coinciding with the ban on mining in the eastern DRC.

JEL Codes: F51, Q34, Q37

Keywords: Event Study, Mining, Conflict Minerals, the Democratic Republic of the Congo, Trade Regulations, Natural Resources

Reference: 102

Individual View

Authors: Rick Van der Ploeg

Nov 2012

The political economy of natural resource extraction is analysed in three different contexts. First, if an incumbent faces a threat of being removed once and for all by a rival faction, extraction becomes more voracious, especially if the rebel faction shares rents much more than the incumbent. Second, perennial political conflict cycles are more inefficient if cohesiveness of the constitution or the partisan in-office bias is large and political instability is high. Third, resource wars are more intense if the political system is less cohesive, there is a partisan in-office bias of the incumbent, oil reserves are high, the wage is low, governments can be less frequently removed from office, and fighting technology has less decreasing returns to scale. Resource depletion in such wars is more rapacious if there is more government instability, the political system is less cohesive, and the partisan in-office bias is smaller.

JEL Codes: D81, H20, Q31, Q38

Keywords: political conflict; cohesiveness; partisan bias; dynamic resource wars; contests; rapacious depletion; exploitation investment; hold-up problem

Reference: 97

Individual View

Authors: Niko Jaakkola

Oct 2012

Mitigating climate change by carbon capture and storage (CCS) will require vast infrastructure investments. These investments include pipeline networks for transporting carbon dioxide (CO2) from industrial sites ('sources') to the storage sites ('sinks'). This paper considers the decentralised formation of trunk-line networks when geological storage space is exhaustible and demand is increasing. Monopolistic control of an exhaustible resource may lead to overinvestment and/or excessively early investment, as these allow the monopolist to increase her market power. The model is applied to CCS pipeline network formation in northwestern Europe. The features identi ed above are found to play a minor role. Should storage capacity be effectively inexhaustible, underinvestment dueto the inability of the monopolist to capture the entire social surplus is likely to have substantial welfare impacts. Multilateral bargaining to coordinate international CCS policies is particularly important if storage capacity is plentiful.

JEL Codes: L50, Q31, Q58

Keywords: carbon capture and storage, exhaustible resources, network formation,spatial networks

Reference: 98

Individual View

Authors: Niko Jaakkola

Oct 2012

I develop a differential game between an oil cartel, and an importer investing in R&D to reduce the cost of a substitute to oil. The equilibrium dynamics mirror the recent oil price collapse: prices first increase, but eventually fall as the cartel is forced to deter unconventional (shale) oil. Interpreting the substitute as clean energy, I assess future climate policy. Credible carbon taxes are below the Pigovian level, implying the importer certainly cannot capture resource rents. Without a tax instrument, the importer curtails long-run pollution using a costly R&D programme. Normatively, carbon taxes are necessary to tackle climate change efficiently.

JEL Codes: D42,O32,Q31,Q40,Q54

Keywords: exhaustible resources, OPEC, oil prices, alternative fuels, limit

Reference: 99

Individual View

Authors: Rick Van der Ploeg, Armon Rezai, Cees Withagen

Sep 2012

In a calibrated integrated assessment model of Ramsey growth and climate change in the global economy we investigate the differential impact of additive and multiplicative global warming damages for both a socially optimal and business-as-usual scenario. Fossil fuel is available at a cost which rises as reserves diminish and a carbon-free backstop is supplied at decreasing cost. If damages are not proportional to aggregate production and the economy is along a development path, the optimal

carbon tax is smaller. The economy switches later from fossil fuel to the carbon-free backstop and leaves less fossil fuel in situ. By adjusting climate policy in this way there is very little difference on the paths for global consumption, output and capital, and thus very little difference for social welfare despite the higher temperatures. For all specifications the optimal carbon tax is not a fixed proportion of world GDP but must follow a hump shape.

JEL Codes: H21, Q51, Q54

Keywords: climate change, multiplicative damages, additive damages, integrated assessment models, Ramsey growth model, fossil fuel, carbon-free backstop

Reference: 93

Individual View

Authors: Raphael Espinoza

Sep 2012

GDP growth in the GCC has been considerably higher than in advanced economies or other oil exporters since 1986. The paper shows that the GCC countries have swiftly accumulated large stocks of physical capital but the population increase and the shift away from oil meant that capital intensity actually decreased or remained roughly constant. On the other hand, the efforts that have been made to improve human capital would have had positive effects on growth, though educational attainment remains below what is achieved by countries with similar levels of income. A growth accounting exercise suggests as a result that the development of Bahrain and Saudi Arabia was hampered by declining TFP, while TFP growth in Qatar and the U.A.E. would have been low. One potential explanation is that the kind of capital that has been accumulated in the region (aircraft, computer equipment, electrical equipment) is not fully productive because the labor force is not educated enough. The paper also discusses the lessons from the empirical growth literature for the GCC. The poor quality of institutions and the large size of government consumption, both of which are possible symptoms of a resource curse, could explain the disappointing TFP growth.

JEL Codes: O43; O53

Keywords: Gulf Cooperation Council; Growth Accounting; Middle East and North Africa; Resource Curse

Reference: 94

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