Working Papers

Authors: Nicolas Berman, Mathieu Couttenier, Dominic Rohner, Mathias Thoenig

Jul 2014

This paper studies empirically the impact of mining on conicts in Africa.

Using novel data, we combine geo-referenced information over the 1997-2010 period on the location and characteristics of violent events and mining extraction of 27 minerals. Working with a grid covering all African countries at a spatial resolution of 0.5 0.5 degree, we find a sizeable impact of mining activity on the probability/intensity of conict at the local level. This is both true for low-level violence (riots, protests), as well as for organized violence (battles). Our main identification strategy exploits exogenous variations in the minerals' world prices; however the results are robust to various alternative strategies, both in the cross-section and panel dimensions. Our estimates suggest that the historical rise in mineral prices observed over the period has contributed to up to 21 percent of the average country-level violence in Africa. The second part of the paper investigates whether minerals, by increasing the nancial capacities of ghting groups, contribute to diffuse violence over time and space, therefore affecting the intensity and duration of wars. We find direct evidence that the appropriation of a mining area by a group increases the probability that this group perpetrates future violence elsewhere. This is consistent with \feasibility" theories of conflict. We also nd that secessionist insurgencies are more likely in mining areas, which is in line with recent theories of secessionist conflict. 

JEL Codes: C23, D74, Q34

Keywords: Minerals, Mines, Conflict, Natural Resources, Rebellion

Reference: 141

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Authors: Lucas Bretschger, Lin Zhang

Jul 2014

There is widespread concern that an international agreement on stringent climate policies will not be reached because it would imply too high costs for fast growing economies like China. To quantify these costs we develop a general equilibrium model with fully endogenous growth. The framework includes disaggregated industrial and energy sectors, endogenous innovation, and sector-speci c investments. We find that the implementation of Chinese government carbon policies until 2020 causes a welfare reduction of 0.3 percent. For the long run up to 2050 we show that welfare costs of internationally coordinated emission reduction targets lie between 3 and 8 percent. Assuming faster energy technology development, stronger induced innovation, and rising energy prices in the reference case reduces welfare losses signi cantly. We argue that increased urbanization raises the costs of carbon policies due to altered consumption patterns.

JEL Codes: Q54, O41, O53, C68

Keywords: Carbon policy; China; Endogenous growth; Induced innovation; Urbanization

Reference: 143

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Authors: Alexander James, Brock Smith

Jun 2014

Over the past decade, the production of shale oil and gas signicantly increased in the United States. This paper uniquely examines how this energy boom has aected regional crime rates throught the United States. There is evidence that, as a result of the ongoing shale-energy boom, shale-rich counties experienced faster growth in rates of both property and violent crimes including rape, assault, murder, robbery, burglary, larceny and grand-theft auto. These results are particularly robust for rates of assault, and less so for other types of crimes. Policy makers should anticipate these effects and invest in public infrastructure accordingly.

JEL Codes: Q3; R11; K42

Keywords: Natural Resources; Hydraulic Fracturing; Crime; Resource Curse.

Reference: 140

Individual View

Authors: Pierre-Louis Vezina

May 2014

Countries restrict the export of natural resources to lower domestic prices, stimulate downstream industries, earn rents on international markets, or on environmental grounds.  This paper provides empirical evidence of evasion of such export barriers. Using tools from the illicit trade literature, I show that exports of minerals, metals, or wood products are more likely to be missing from the exporter's statistics if they face export barriers such as prohibitions or taxes. Furthermore, I show that this relationship is signi cantly higher in countries with high levels of corruption and bribes at customs. The results have implications for the design of trade policies and environmental protection.

JEL Codes: F13, O17, O19

Keywords: natural resources, illegal trade, trade barriers

Reference: 139

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Authors: Saraky Andrade de Sa, Julien Daubanes

May 2014

Demand for oil is very price inelastic. Facing such demand, an extractive cartel induces the highest price that does not destroy its demand, unlike the conventional Hotelling analysis: the cartel tolerates ordinary substitutes to its oil but deters high-potential

ones. Limit-pricing equilibria of non-renewable-resource markets sharply differ from usual Hotelling outcomes. Resource taxes have no effect on current extraction; extraction may only be reduced by supporting its ordinary substitutes. The carbon tax

applies to oil and also penalizes its ordinary (carbon) substitutes, inducing the cartel to increase current oil production. The carbon tax further affects ultimately-abandoned oil reserves ambiguously.

JEL Codes: Q30; L12; H21; Q42

Keywords: Limit pricing; Non-renewable resource; Monopoly; Demand inelasticity; Substitutes subsidies

Reference: 136

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Authors: Anna Grodecka, Karlygash Kuralbayeva

May 2014

What is the optimal instrument design and choice for a regulator attempting to control emissions by private agents in face of uncertainty arising from business cycles? In applying Weitzman's result [Prices vs. quantities, Review of Economic Studies, 41 (1974), 477-491] to the problem of greenhouse gas emissions, the price-quantity literature has shown that, under uncertainty about abatement costs, price instruments (carbon taxes) are preferred to quantity restrictions (caps on emission), since the damages from climate change are relatively at. On the other hand, another recent piece of academic literature has highlighted the importance of adjusting carbon taxes to business cycle uctuations in a procyclical manner. In this paper, we analyze the optimal design and the relative performance of price versus quantity instruments in the face of uncertainty stemming from business cycles. Our theoretical framework is a general equilibrium real business cycle model with a climate change externality and distortionary scal policy. First, we nd that in an in nitely exible control environment, the carbon tax uctuates very little and is approximately constant, whilst emissions uctuate a great deal in response to a productivity shock. Second, we nd that a xed price instrument is advantageous over a xed quantity instrument due to the cyclical behavior of abatement costs, which tend to increase during expansions and decline during economic downturns. Our results suggest that the carbon tax is approximately constant over business cycles due to \at" damages in the short-run and thus procyclical behavior as suggested by other studies cannot be justi ed merely on the grounds of targeting the climate externality.

JEL Codes: E32, H23, Q54, Q58

Keywords: carbon tax, cap-and-trade, business cycles, distortionary taxes, climate change

Reference: 137

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The optimal response to a potential productivity shock which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption. This paper investigates how differences between regions in terms of their vulnerability to climate change and their stage of development affect the cooperative and non-cooperative responses to this aspect of climate change. It is shown that the cooperative response to these stochastic tipping points requires converging carbon taxes for developing and developed regions. The non-cooperative response leads to a bit more precautionary saving and diverging carbon taxes. We illustrate the various outcomes with a simple stylized North-South model of the global economy.

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

Keywords: global warming, tipping point, precautionary capital, growth, risk avoidance, carbon tax, free riding, international cooperation, asymmetries.

Reference: 149

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Authors: Thorvaldur Gylfason, Gylfi Zoega

May 2014

Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-2008 another national treasure, the sovereign’s AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years.

JEL Codes: F41, O23, O33

Keywords: Natural resource curse, Dutch disease, financial crisis

Reference: 138

Individual View

We derive a simple rule for a nearly optimal carbon tax that can be implemented and tested in a decentralized market economy. Our simple rule depends on the effect of the pure rate of time preference, growth and intergenerational inequality aversion and basic parameters of the carbon cycle, but also on any adverse effects of global warming on economic growth and mean reversion in climate damages. The performance of the simple rule is excellent and yields only tiny welfare losses compared with the true welfare optimum under a wide range of perturbations including some extreme runs designed to severely road-test the rule. Our IAM allows for scarce fossil fuel and endogenous energy transitions and generates cumulative carbon emissions and stranded assets which are also well predicted by our rule.

JEL Codes: H21, Q51, Q54

Keywords: simple rule, welfare losses, optimal carbon tax, intergenerational inequality aversion, growth, alternative climate damage specifications, stranded assets, transition times

Reference: 150

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Authors: Radoslaw (Radek) Stefanski

Apr 2014

I develop a unique database of international fossil-fuel subsidies by examining country specific patterns in carbon emission-to-GDP ratios, known as emission-intensities. For most but not all countries, intensities tend to be hump-shaped with income. I construct a model of structural-transformation that generates this hump-shaped intensity and then show that deviations from this pattern must be driven by distortions to sectoral-productivity and/or fossil-fuel prices. Finally, I use the calibrated model to measure these distortions for 170 countries for 1980-2010. This methodology reveals that fossil-fuel price-distortions are large, increasing and often hidden. Furthermore, they are major contributors to higher carbonemissions and lower GDP.

Reference: 134

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Authors: Sjak Smulders, Michael Toman, Cees Withagen

Apr 2014

The relatively new and still amorphous concept of “Green Growth” can be understood as a call for balancing longer-term investments in sustaining environmental wealth with nearer-term income growth to reduce poverty. We draw on a large body of  economic theory available for providing insights on such balancing of income growth and environmental sustainability. We show that there is no a priori assurance of substantial positive spillovers from environmental policies to income growth, or for a monotonic transition to a “green steady state” along an optimal path. The greenness of an optimal growth path can depend heavily on initial conditions, with a variety of different adjustments occurring concurrently along an optimal path. Factor-augmenting technical change targeting at offsetting resource depletion is critical to sustaining long-term growth within natural limits on the availability of natural resources and environmental services.

JEL Codes: O1, O3, O4, Q2, Q3, Q4

Keywords: growth; environment; natural resources; innovation; R&D spillovers; sustainable development; natural capital

Reference: 135

Individual View

Authors: Brock Smith

Mar 2014

This paper examines the impact of the oil price boom in the 1970s and the subsequent bust on non-oil economic activity in oil-dependent countries. During the boom, manufacturing exports and value added increased significantly relative to non-oil dependent countries, along with wages, employment, and capital formation. These measures decreased, though to a lesser and more gradual extent, during the bust and subsequent period of low prices, displaying a positive relationship with oil prices. However, exports of agricultural products sharply decreased during the boom. Imports of all types of goods displayed strong procyclicality with respect to oil prices. The results suggest that increased local demand and investment spillovers induced by the oil revenue windfall resulted in increased manufacturing activity.

Keywords: Oil; Dutch Disease; Resource Curse; Manufacturing; Trade

Reference: 133

Individual View

Authors: Anthony Venables, Paul Collier

Feb 2014

Climate policy requires that much of the world’s reserves of fossil fuels remain unburned. This paper makes the case for implementing this directly through policy to close the global coal industry. Coal is singled out because of its high emissions intensity, low rents per unit value, local environmental costs and sheer scale. Direct supply policy – the sequenced closure of coal mines – may lead to less policy leakage (across countries and time) than other policies based on demand or price management. It also has the advantage of involving relatively few players and leading to clear-cut and observable outcomes. Appropriately sequenced closure of the world coal industry could, we suggest, create the moral force needed to mobilize collective international action.

JEL Codes: Q3, Q4, Q54

Keywords: climate change, coal, cap and trade, supply policy

Reference: 132

Individual View

Authors: Alexander B. Lippert

Jan 2014

Do local populations bene t from resource booms? How strong are market linkages between the mining sector and the regional economy? This paper exploits exogenous variation in mine-level production volumes generated by the recent copper boom in Zambia to shed light on these questions.  Using a novel dataset, I nd robust evidence that an increase in local copper production improves living standards in the surroundings of the mines even for households not directly employed in the mining sector: a 10% increase in constituency-level copper output is associated with a 2% increase in real household expenditure; positive effects on housing conditions, consumer durable ownership and child health are of similar magnitude. The positive spill-overs extend to the rural hinterland of mining cities, neighboring constituencies, and constituencies on the copper transportation route. Additionally, I identify boom-induced changes in the demand for services and agricultural products as key channels through which the urban and rural populations benefit from the mine expansions. Since the boom failed to generate fiscal revenues, these effects can be interpreted as the result of the mines' backward linkages. Taken together, these findings highlight the welfare potential of local procurement policies in resource rich developing countries.

JEL Codes: I31, O12, O13, Q32, Q33

Keywords: Commodity Shocks, Local Development, Mining, Natural Resources

Reference: 131

Individual View

Authors: Rick Van der Ploeg, Gerard van der Meijden, Cees Withagen

Jan 2014

A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given. The effects of stock-dependent extraction costs are separately discussed in an appendix.

JEL Codes: D90, H20, Q31, Q38

Keywords: Global warming, Green Paradox, Hotelling rule, oil importers, oil producers, investment, capital markets, carbon tax, exploration investment, general equilibrium

Reference: 130

Individual View

Authors: Rick Van der Ploeg, Ton van den Bremer

Dec 2013

One of the most important developments in international finance and resource economics in the past twenty years is the rapid and widespread emergence of the $6 trillion sovereign wealth fund industry. Oil exporters typically ignore below-ground assets when allocating these funds, and ignore above-ground assets when extracting oil. We present a unified stylized framework for considering both. Subsoil oil should alter a fund’s portfolio through additional leverage and hedging. First-best spending should be a share of total wealth, and any unhedgeable volatility must be managed by precautionary savings. If oil prices are pro-cyclical, oil should be extracted faster than the Hotelling rule to generate a risk premium on oil wealth. Finally, we discuss how our analysis could improve the management of Norway’s fund in practice.

JEL Codes: E21, F65, G11, G15, O13, Q32, Q33

Keywords: oil revenue, portfolio allocation, sovereign wealth fund, leverage, hedging, optimal extraction, prudence, risk aversion

Reference: 129

Individual View

The principles of how best to manage the various components of national wealth are outlined, where the permanent income hypothesis, the Hotelling rule and the Hartwick rule play a prominent role. As far as managing natural resource wealth is concerned, a case is made to use an intergenerational sovereign wealth fund to smooth consumption across generations, a liquidity fund for the precautionary buffers to deal with commodity price volatility, and an investment fund to park part of the windfall until the country is ready to absorb extra spending on domestic investment. Capital scarcity implies that a positive part of the windfall should be spent on domestic investment. The conclusions highlight the political economy problems that will have to be tackled with these normative proposals for managing wealth.

JEL Codes: E21, E22, D91, Q32

Keywords: permanent income, Hotelling rule, Hartwick rule, precaution, capital scarcity, absorption constraints, Dutch disease, investing to invest, political economy

Reference: 128

Individual View

Authors: James Cust, Torfinn Harding

Nov 2013

We provide evidence that institutions strongly influence where oil and gas exploration takes place. To identify the effect of institutions, we utilise a global dataset on the location of exploration wells and national borders. This allows for a regression discontinuity design, with the key assumption that the position of borders was determined independently of geology. To break potential simultaneity between borders, institutions and activities in the oil sector, we exploit the historical sequence of drilling occurring after the formation of borders and institutions. At borders, exploration companies choose to drill on the side with better institutional quality 58% of the time. The results are consistent with the view that institutions shape exploration companies’ incentives to invest in drilling as well as host countries’ supply of drilling opportunities. It follows that the observed distribution of natural capital across countries is endogenous with respect to institutions.

JEL Codes: F21, O13, O43, Q32

Keywords: institutions, investment, oil and gas exploration, regression discontinuity design

Reference: 127

Individual View

Authors: Karlygash Kuralbayeva

Oct 2013

I build an equilibrium search and matching model of an economy with an informal sector and rural urban migration to analyze the effects of budget-neutral green tax policy (raising pollution taxes, while cutting payroll taxes) on the labor market. The key results of the paper suggest that when general public spending varies endogenously in response to tax reform and higher energy taxes can reduce the income from self-employed work in the informal sector, green tax policy can produce a triple dividend: a cleaner environment, lower unemployment rate and higher after-tax income of the private sector. This is due to the ability of the government, by employing public spending as an additional policy instrument, to reduce the overall tax burden when an increase in energy tax rates does not exceed some threshold level. Thus governments should employ several instruments if they are concerned with labor market implications of green tax policies.

JEL Codes: H20, H23, H30

Keywords: informal sector, matching frictions, pollution taxes, double dividend

Reference: 125

Individual View

Authors: Alexander James

Oct 2013

An analytical framework predicts that, in response to an exogenous increase in resource based government revenue, a benevolent government will partially substitute away from taxing income, increase spending and save. Forty-two years of U.S. state-level data are consistent with this theory. Specifically, a baseline fixed effects model predicts that a 1% point increase in resource revenue results in a .20% point decrease in non-resource revenue, a .50% point increase in spending and a .30% point increase in savings. These results are generally robust to alternative model specifications and the instrumentation of resource-based government revenue. Interaction effects reveal some asymmetry in the fiscal response to revenue shocks according to state political leanings.

JEL Codes: Q38; H20

Keywords: Severance Tax; Fiscal Policy; Natural Resources

Reference: 126

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Authors: Rabah Arezki, Kaddour Hadri, Prakash Loungani, Yao Rao

Oct 2013

In this paper, we re-examine two important aspects of the dynamics of relative primary commodity prices, namely the secular trend and the short run volatility. To do so, we employ 25 series, some of them starting as far back as 1650 and powerful panel data stationarity tests that allow for endogenous multiple structural breaks. Results show that all the series are stationary after allowing for endogeneous multiple breaks. Test results on the Prebisch-Singer hypothesis, which states that relative commodity prices follow a downward secular trend, are mixed but with a majority of series showing negative trends. We also make a .rst attempt at identifying the potential drivers of the structural breaks. We end by investigating the dynamics of the volatility of the 25 relative primary commodity prices also allowing for endogenous multiple breaks. We describe the often time-varying volatility in commodity prices and show that it has increased in recent years.

Reference: 124

Individual View

Authors: Rick Van der Ploeg, Armon Rezai

Sep 2013

Keeping climate change within limits requires that most of the available carbon-based energy sources need to be abandoned underground. We study how fast and how much this transition to carbon-free energy needs to occur within a welfare-maximizing Ramsey growth model of climate change. Our model also addresses the market failure in the development of clean energy which leads to an under-provision of renewable energy, delays the transition time to the carbon-free era, and reduces the amount of dirty fuels locked up in situ. Optimal policy requires an aggressive renewables subsidy in the near term and a gradually rising carbon tax which falls in long run. We also study the transition timing and the performance of recently proposed policy rules for the carbon tax.

JEL Codes: H21, Q51, Q54

Keywords: climate change, integrated assessment, Ramsey growth, carbon tax, renewables subsidy, learning by doing, directed technical change, multiplicative damages, additive damages

Reference: 123

Individual View

Optimal climate policy should act in a precautionary fashion to deal with tipping points that occur at some future random moment. The optimal carbon tax should include an additional component on top of the conventional present discounted value of marginal global warming damages. This component increases with the sensitivity of the hazard to temperature or the stock of atmospheric carbon. If the hazard of a catastrophe is constant, no correction is needed of the usual Pigouvian tax. The results are applied to a tipping point resulting from an abrupt and irreversible release of greenhouse gases from the ocean floors and surface of the earth, which set in motion a positive feedback loop. Convex enough hazard functions cause overshooting of the carbon tax, but a linear hazard function gives rise to undershooting. A more convex hazard function and a high discount rate speed up adjustment.

JEL Codes: D81, H20, Q31, Q38

Keywords: social cost of carbon, tipping point, positive feedback, climate

Reference: 122

Individual View

Authors: Samuel Wills

Aug 2013

How should monetary policy respond to an oil discovery? Oil discoveries provide news that the natural level of output will rise in the future, which lowers the natural real rate of interest. Optimal monetary policy must accommodate these changes in natural output, and is well-approximated by a Taylor rule that responds to the natural real rate. Failure to accommodate these changes, as in a currency peg or naive Taylor rule, can cause forward-looking inflation and a recession. To prove this I incorporate oil and news shocks into a standard DSGE model of a small open economy that permits an analytical solution for optimal policy. I then use the model to present a novel explanation for the UK’s recessions of the 1970s and 80s, based on the discovery of North Sea oil.

JEL Codes: E52, E62,F41,O13,Q30,Q33

Keywords: News shock,oil, optimal monetary policy,small open economy

Reference: 121

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Authors: Rabah Arezki, Klaus Deininger, Harris Selod

Aug 2013

We review evidence regarding the size and evolution of the "land rush" in the wake of the 2007-2008 boom in agricultural commodity prices and study determinants of foreign land acquisition for large-scale agricultural investment. Using data on bilateral investment relationships to estimate gravity models of transnational land-intensive investments confirms the central role of agro-ecological potential as a pull factor but contrasts with standard literature insofar as quality of the destination country’s business climate is insignificant and weak tenure security is associated with increased interest for investors to acquire land in that country. Policy implications are discussed.

JEL Codes: F21, O13, Q15, Q34

Keywords: Land Acquisition, Large-Scale Agriculture, Foreign Investments, Agro-Ecological Potential, Land Availability, Land Governance, Property Rights

Reference: 120

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