Working Papers

Authors: Rick Van der Ploeg

Jul 2020

The social rate of discount is a crucial driver of the social cost of carbon (SCC), i.e. the expected present discounted value of marginal damages resulting from emitting one ton of carbon today. Policy makers should set carbon prices to the SCC using a carbon tax or a competitive permits market. The social discount rate is lower and the SCC higher if policy makers are more patient and if future generations are less affluent and policy makers care about intergenerational inequality. Uncertainty about the future rate of growth of the economy and emissions and the risk of macroeconomic disasters (tail risks) also depress the social discount rate and boost the SCC provided intergenerational inequality aversion is high. Various reasons (e.g. autocorrelation in the economic growth rate or the idea that a decreasing certainty-equivalent discount rate results from a discount rate with a distribution that is constant over time) are discussed for why the social discount rate is likely to decline over time. A declining social discount rate also emerges if account is taken from the relative price effects resulting from different growth rates for ecosystem services and of labour in efficiency units. The market- based asset pricing approach to carbon pricing is contrasted with a more ethical approach to policy making. Some suggestions for further research are offered.

JEL Codes: D81, D90, G12, H43, Q51, Q54, Q58

Keywords: cost-benefit analysis, climate policy, carbon pricing, social discount rate, term structure, Keynes-Ramsey rule, risk and uncertainty, disasters, expert opinions

Reference: 244

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Authors: Patrick Bennett, Chiara Ravetti, Po Yin Wong

Jan 2020

This paper uses the first discovery of oil a nd gas in Norway as a natural experiment to study the long run labour market implications of a positive economic shock. Existing studies largely focus on short term dynamics and on men, but the effects on women and their persistence in time are less known. Following the same individuals for up to two decades in the Norwegian Registry and Census data, we find that the oil discovery significantly increased male earnings (up to 7% annually), while female earnings declined (more than 10%). The shift in annual income is still present 15 years after the discovery. Labour force participation increased among men, while it declined for women in full-time employment. Specifically, the decline in female earnings was driven by married women. Moreover, men in oil regions shifted into high-paying occupations while women did the opposite after the discovery of oil. However, the income loss for women is mostly a short-term phenomenon: we find that women’s lifetime income improved for later cohorts.

Reference: 223

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Authors: Ridwan D. Rusli, Wessel N. Vermeulen

Dec 2019

We examine the economic consequences of resource extraction and the associ-ated revenue windfalls on subnational government revenues and spending patterns. Making use of Indonesia’s fiscal sharing rules and an offshore oil and gas produc-tion instrument, we find a positive impact of resource revenues on the center-local balancing funds including the general allocation fund, despite the latters’ fiscal re-balancing purposes. Fiscal windfalls from resource extraction increase public sector spending on capital and infrastructure projects as well as public goods and services, with positive spillover benefits on local tax revenues. At the same time spending on personnel and administration increases less and decrease as percentage of total expenditures. Interaction with district economic governance index data indicates enhanced infrastructure spending but also increases in the balancing funds.

JEL Codes: H71, O13, Q32

Keywords: Resource extraction; fiscal- and direct economic spillovers; decen¬tralization; subnational government budgets; South-East Asia; Indonesia

Reference: 222

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Authors: Anja Benshaul-Tolonen, Sarah Baum

Oct 2019

Does structural transformation matter for gender equality? This paper reviews the gender impacts of the highest value export industry in low and middle income countries—the extractive industries (oil, gas and mining). First, we analyze cross-country relationships between natural resource dependence and gender welfare indicators. Countries that are dependent on natural resource rents have greater gender inequality, lower education levels and more patriarchal norms, even after taking GDP per capita levels into account. Second, we conduct a comprehensive review of the empirical literature on the impact of extractive industries on women and gender relations, covering topics such as labor force participation, marriage markets, health, and security. The review points to extractive industries as a mixed blessing for women, showing heterogeneity across genders, sectors, and contexts. We propose new directions for research to ensure that extractive industries generate inclusive growth.

Reference: 221

Individual View

Authors: Sebastian Axbard, Anja Benshaul-Tolonen, Jonas Poulsen

Oct 2019

A large literature has highlighted the potential detrimental effects of natural resource wealth on social, economic and political outcomes. We study a previously largely unexplored relationship - the impact of natural resource wealth on criminal activity. Our empirical strategy exploits price fluctuations in 15 internationally traded minerals to study the impact of mineral wealth on local crime levels in South Africa - leveraging detailed crime data from 1,084 police precincts over 10 years. We find that increased mineral wealth leads to a reduction in criminal activity. An exploration of mechanisms suggest that the effect is due to changes in employment opportunities created by the mining industry, affecting the opportunity cost of engaging in criminal activity. Consistent with this we also document that results are driven by property crime and that mines are less likely to close down when prices are high. Our results suggest that downward shifts in international mineral prices can cause surges in crime. To investigate how resilience against such surges can be achieved, we exploit the roll-out of a government employment guarantee program and document that the program reduces the crime response to changes in international mineral prices.

JEL Codes: K42, D74, O13

Keywords: Extractive Industries, Mining, Crime

Reference: 220

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Authors: Christa N. Brunnschweiler, Steven Poelhekke

May 2019

Does institutional change in the petroleum sector lead to more oil and gas ex-ploration and discoveries? Foreign ownership and investment in the sector has tra-ditionally been unrestricted. We document that this is no longer the case; foreign-domestic partnerships are the norm today. Tracking changes in legislation between 1867 and 2008 for a panel of countries, we show that switching to foreign ownership results in more drilling and more discoveries of petroleum than domestic ownership. Switching to partnership yields even more drilling, but yields fewer discoveries. Dis¬coveries, and the intensity and quality of exploration drilling, are endogenous to industry-specific institutional change.

JEL Codes: E02, O43, Q30

Keywords: discoveries, oil and gas, natural resources, institutions

Reference: 219

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This paper investigates how counterterrorism that targets terrorist leaders, and thereby undermines control within terrorist organizations, affects terrorist attacks. The pa¬per exploits a natural experiment provided by strikes by Unmanned Aerial Vehicles (drones) ‘hitting’ and ‘missing’ terrorist leaders in Pakistan. Results suggest that ter¬rorist groups increase the number of attacks they commit after a drone ‘hit’ on their leader, compared to after a ‘miss’. This increase amounts to 29 terrorist attacks (43%) worldwide per group in the six months after a drone strike. Game theory provides sev¬eral explanations for the observed effect. Additional analysis of heterogenous effects across groups, and the impact of drone hits on the timing, type and target of attacks, attacks by affiliated terrorist groups, infighting and group splintering, indicates that aggravated problems of control (principal-agent and collective action problems) explain these results better than alternative theoretical mechanisms.

JEL Codes: D74, F5, O10

Keywords: Terrorism, Targeted Leader Killing, Unmanned Aerial Vehicles

Reference: 218

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Authors: Anja Tolonen

Feb 2019

Does industrial development change gender roles? This is the first paper to causally explore the effects of a continent-wide expansion of a modern industry on gender roles, captured by attitudes and behaviors. Identification relies on plausibly exogenous spatial-temporal variation in gold mining in Africa. The establishment of industrial-scale mines induces female empowerment—justification of domestic violence decreases by 19%, women have better access to healthcare, and are 31% more likely to work in services— alongside rapid economic growth. Findings are robust to assumptions about trends, distance, and migration and show that gender roles can change rapidly with economic development.

Revised February 2019

JEL Codes: O12; O13; J16

Keywords: Gender Roles, Female Empowerment, Local Industrial Development, Gold Mining

Reference: 209

Individual View

Authors: Elizabeth Baldwin, Yongyang Cai, Karlygash Kuralbayeva

Feb 2019

Applying climate policy in practice means considering capital stocks: some assets will pro¬duce pollution whenever they are used, and some will not. Therefore long-term abatement plans should influence current investment. Moreover, newer technologies exhibit learning-by-doing in the deployment of associated infrastructure. We investigate these ideas from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our “irreversibility effect”. We also show that the optimal innovation subsidy increases with the deployment rate: our “acceleration effect”. Considering second-best settings, we show that, although carbon taxes achieve stringent policy targets more efficiently, subsidies to the “renewables” sector deliver higher welfare when policy targets are more mild.

Revised February 2019

JEL Codes: O44, Q54, Q58

Keywords: Infrastructure, Clean and Dirty Energy Inputs, Renewable Energy, Stranded Assets, Carbon Budget, Climate Change Policies, Green Paradox

Reference: 204

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Authors: Saeed Moshiri, Gry Østenstad, Wessel N. Vermeulen§

Feb 2019

This study investigates the effects of an oil boom on firms’ performance using data from the Canadian Annual Survey of Manufactures. We exploit the time variation of the booming natural resource sector activity in an oil-producing area with the location of manufacturing plants. We hypothesize that the effect of the booming sector on plants depends on their spatial proximity, which allows us to create an exogenous treatment variable. The outcome variables include plant-level wages, employment, sales, and exports. We find that the effect of the booming sector on the incidence of exporting varies greatly by plant-level productivity. More productive plants become more likely to export relative to less productive plants. They can do so by paying a higher wage, while employment grows less than plants that serve only the domestic market. We find that initial productivity and plants’ ability to export provides an important differentiation in average plants effects. In particular, while there is a great variety in the effect by sector, a clear linkage with the resource industry is not observed.

JEL Codes: L6, O4, R11, R15

Keywords: natural resources, heterogeneous firms, regional economics

Reference: 216

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Authors: Roberto Bonfatti, Yuan Gu, Steven Poelhekke

Jan 2019

Africa’s interior-to-coast roads are well suited to export natural resources, but not to support regional trade. Are they the optimal response to geography and comparative advantage, or the result of suboptimal political distortions? We investigate the political determinants of road paving in West Africa across the 1965-2012 period. Controlling for ge¬ography and the endogeneity of democratization, we show that autocracies tend to connect natural resource deposits to ports, while the networks expanded in a less interior-to-coast way in periods of democracy. This result suggests that Africa’s interior-to-coast roads are at least in part the result of suboptimal political distortions.

JEL Codes: P16, P26, D72, H54, O18, Q32

Keywords: political economy, democracy, infrastructure, natural resources, development

Reference: 215

Individual View

Authors: Paul Pelz, Steven Poelhekke

Sep 2018

We analyse the local effect of exogenous shocks to the value of mineral deposits at the district level in Indonesia using a panel of manufacturing plants. To the best of our knowledge, we are the first to model and estimate the effect of heterogeneity in natural resource extraction methods. We find that in areas where mineral extraction is relatively capital-intensive, mining booms cause virtually no upward pressure on manufacturing earnings per worker, and both producers of traded and local goods benefit from mining booms in terms of employment. In contrast, labour-intensive mining booms drive up local manufacturing wages such that producers of traded goods reduce employment. This source of heterogeneity helps to explain the mixed evidence for `Dutch disease' effects in the literature. In addition, we find no evidenc revenue sharing between sub-national districts leads to any spillovers.

JEL Codes: L16; L72; O12; O13; Q30

Keywords: Dutch disease, natural resources, mining, labour intensity, Indonesia

Reference: 214

Individual View

Authors: Rick Van der Ploeg, Armon Rezai

Aug 2018

A simple integrated assessment framework that gives rules for the optimal carbon price, transition to the carbon-free era and stranded carbon assets is presented, which highlights the ethical, economic, geophysical and political drivers of optimal climate policy. For the ethics we discuss the role of intergenerational inequality aversion and the discount rate, where we show the importance of lower discount rates for appraisal of longer run benefit and of policy makers using lower discount rates than private agents. The economics depends on the costs and rates of technical progress in production of fossil fuel, its substitute renewable energies and sequestration. The geophysics depends on the permanent and transient components of atmospheric carbon and the relatively fast temperature response, and we allow for positive feedbacks. The politics stems from international free-rider problems in absence of a global climate deal. We show how results change if different assumptions are made about each of the drivers of climate policy. Our main objective is to offer an easy back-on-the-envelope analysis, which can be used for teaching and communication with policy makers.

JEL Codes: D81, H20, Q31, Q38

Keywords: simple rules, climate policy, ethics, economics, geophysics, politics, discounting with declining discount rates, positive feedback, free riding

Reference: 213

Individual View

Authors: Jacquelyn Pless, Arthur A. van Benthem

Jul 2018

We formalize pass-through over-shifting as a simple yet under-utilized test for market power.
We apply this test in the market for solar energy. Speci cally, we estimate the pass-through of
solar subsidies to solar system prices using rich micro-level transaction and subsidy data from
California. Buyers of solar systems capture nearly the full subsidy, while there is more-than-
complete pass-through to lessees. We conclude that solar markets are imperfectly competitive
by ruling out alternative explanations for over-shifting, and reinforce this conclusion with a test
of solar demand curvature. This procedure can serve to detect market power beyond the solar

JEL Codes: H22, Q42, Q48, Q58

Keywords: solar subsidy, pass-through, over-shifting, demand curvature, market power, third-

Reference: 212

Individual View

Jun 2018

This paper investigates the impact of an increase in the world price of a ‘lootable’, labour-intensive natural resource on the intensity of violent conflict. It suggests that such a price increase can have opposite effects at different geographical levels of analysis: a decrease in conflict intensity at the country level due to rising opportunity costs of rebellion, but an increase in conflict intensity in resource-rich sub-national regions, as returns to looting rise. The paper introduces a new measure of diamond
propensity based on geological characteristics, which is arguably exogenous to conflict and can capture small-scale labour-intensive production better than existing measures. The stated effects are found for secondary diamonds, which are lootable and related to opportunity costs of fighting, but not for primary diamonds, which are neither.

Reference: 211

Individual View

Authors: Thiemo Fetzer, Stephan Kyburz

Jun 2018

Can institutionalized transfers of resource rents be a source of civil conflict?
Are cohesive institutions better in managing distributive conflicts? We study
these questions exploiting exogenous variation in revenue disbursements to
local governments together with new data on local democratic institutions in
Nigeria. We make three contributions. First, we document the existence of a
strong link between rents and conflict far away from the location of the actual
resource. Second, we show that distributive conflict is highly organized involving
political militias and concentrated in the extent to which local governments
are non-cohesive. Third, we show that democratic practice in form having
elected local governments significantly weakens the causal link between rents
and political violence. We document that elections (vis-a-vis appointments), by
producing more cohesive institutions, vastly limit the extent to which distributional
conflict between groups breaks out following shocks to the available
rents. Throughout, we confirm these findings using individual level survey

JEL Codes: Q33, O13, N52, R11, L71

Keywords: conflict, ethnicity, natural resources, political economy, commodity prices

Reference: 210

Individual View

Authors: Anja Tolonen

Apr 2018

Local industrial development has the potential to improve health and well-being,
while also damaging health through exposure to harmful pollution. It is an empirical
question which of these effects dominate. Exploiting the quasi-experimental expansion
of African large-scale gold mining, I find that local infant mortality rates decrease
by more than 50% alongside rapid economic growth. The instantaneous reduction is
comparable to overall gains in infant survival rates in the study countries from 1970 to
today. The results are robust to migration. Local industrial development—despite risk
of pollution—may be an effective tool to reduce infant mortality in developing countries

JEL Codes: O12, O13, I15, J13

Keywords: Industrial Development, Natural Resources, Gold Mining, Infant Mortality,

Reference: 208

Individual View

Authors: Rick Van der Ploeg, Aart de Zeeuw

Apr 2018

The optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs. We also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity. Finally, we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping. Quantitatively, the results are investigated with a calibrated model for the world economy.

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

Keywords: climate tipping point, risk, social cost of carbon, precautionary capital, economic growth.

Reference: 207

Individual View

Authors: Rick Van der Ploeg, Armon Rezai

Mar 2018

Unanticipated climate policy curbs the value of physical capital that is costly to adjust. We illustrate this by showing that climate policy to keep peak global warming below 2°C depresses the share prices of oil and gas majors and their market capitalisation, curbs exploration investment and oil and gas discoveries, boosts proven reserves left abandoned in the crust of the earth, cuts exploitation investment, and induces an earlier onset of the carbon-free era. For a given carbon budget, an immediate carbon tax is the first-best response but delaying the carbon tax or a renewable energy subsidy to meet the same temperature target are preferred by shareholders because they introduce Green Paradox effects and protect the profitability of existing capital.

JEL Codes: D20, D53, D92, G11, H32, Q02, Q35, Q38, Q54

Keywords: climate policy, fossil fuel, exploration investment, discoveries, exploitation investment, stranded carbon assets, stock prices, irreversible capital, adjustment costs

Reference: 206

Individual View

Authors: Ohad Raveh, Yacov Tsur

Feb 2018

We identify an adverse consequence of natural resource windfalls, which is partic-
ularly detrimental in advanced democracies. We construct a political economy model
with endogenous public debt under exogenous resource windfall shocks, in which po-
litical myopia results from reelection prospects. Reelection-seeking politicians, while
more accountable toward their electorate, are also more myopic. The latter e ect
gives rise to a budget de cit bias, with the ensuing debt buildup that is exacerbated
by resource windfalls. We nd that the positive e ect of resource windfalls on debt
increases as the restrictions on reelection get laxer. We test the model's predictions
using a panel of U.S. states over the period 1963-2007. Our identi cation strategy
rests on constitutionally-entrenched di erences in gubernatorial term limits that pro-
vide plausibly exogenous cross-sectional and time variation in political time horizon,
and geographically-based cross-state di erences in natural endowments interacted with
the international prices of oil and gas. The empirical ndings corroborate the model's
predictions. In particular, our baseline estimates indicate that a resource windfall of
$1 induces an increase of approximately g14:7 in the public debt of states with no
gubernatorial term limits.

JEL Codes: Q32, H63, H74

Keywords: Resource windfalls, public debt, political myopia reelection

Reference: 205

Individual View

Authors: Rick Van der Ploeg, Ton S. Van den Bremer

Jan 2018

A popular model of economy and climate change has logarithmic preferences and damages proportional to the carbon stock in which case the certainty-equivalent carbon price is optimal. We allow for different aversions to risk and intertemporal fluctuations, convex damages, uncertainties in economic growth, atmospheric carbon, climate sensitivity and damages, correlated risks, and distributions that are skewed in the longer run to capture climate feedbacks. We derive a non-certainty-equivalent rule for the carbon price, which incorporates precautionary, risk-insurance and risk-exposure, and climate beta effects to deal with future economic and climatic risks. We interpret these effects with a calibrated DSGE model.

JEL Codes: H21, Q51, Q54

Keywords: precaution, insurance, economic, climatic and damage uncertainties, skewness, mean reversion, climate betas, risk aversion, prudence, intergenerational inequality aversion, convex damages, DSGE

Reference: 203

Individual View

Authors: Rick Van der Ploeg, Armon Rezai

Nov 2017

With the election of President Trump, climate deniers moved from the fringes to the centre of global policy making and need to be addressed in policy-making. An agnostic approach to policy, based on Pascal’s wager, gives a key role to subjective prior probability beliefs about whether climate deniers are right. Policy makers that assign a 10% chance of climate deniers being correct set the global price on carbon to $19.1 per ton of emitted CO2 in 2020. Given that a non-denialist scientist making use of the DICE integrated assessment model sets the price at $21.1/tCO2, agnostics’ reflection of remaining scientific uncertainty leaves climate policy essentially unchanged. The robustness of an ambitious climate policy also follows from using the max-min or the min-max regret principle. Letting the coefficient of relative ambiguity aversion vary from zero corresponding to expected utility analysis to infinity corresponding to the max-min principle, it is possible to show how policy makers deal with fundamental climate model uncertainty when they are prepared to assign prior probabilities to different views of the world being correct. Allowing for a wide range of sensitivity exercises including damage uncertainty, it turns out that pricing carbon is the robust response under rising climate scepticism.

JEL Codes: H21, Q51, Q54

Keywords: climate model uncertainty, climate scepticism, robust climate policies, max-min, min-max regret, ambiguity aversion, DICE integrated assessment model

Reference: 202

Individual View

A cap on global warming implies a tighter carbon budget which can be enforced with a credible second-best renewable energy subsidy designed to lock up fossil fuel and curb cumulative emissions. Such a subsidy brings forward the end of the fossil fuel era, but accelerates fossil fuel extraction and global warming in the short run. A weaker fossil fuel oligopoly implies that anticipation of a given global carbon budget induces fossil producers to deplete reserves more voraciously and accelerate global warming. This race to burn the last ton of carbon is more intensive for the feedback than open-loop Nash equilibrium, so that the Green Paradox effect of a renewable energy subsidy is stronger. There is an intermediate phase of limit pricing to keep renewable energy producers at bay, which becomes much more relevant when a cap on global warming is enforced. A stronger fossil fuel oligopoly lengthens the period of limit pricing and typically brings forward the carbon-free era. Finally, the mere risk of a cap on global warming being enforced at some unknown, future date makes fossil fuel extraction more voracious and accelerates global warming

JEL Codes: H21, Q51, Q54

Keywords: Second-best climate policy, Green Paradox, carbon budget, stranded assets, oligopolistic resource markets, limit pricing, voracious extraction, regime shift.

Reference: 201

Individual View

Authors: Ohad Raveh, Yacov Tsur

Nov 2017

JEL Codes: H63, C61, H74

Keywords: Economic growth, public debt, political myopia, term limits

Reference: 200

Individual View

Authors: Pierre-Louis Vezina

Nov 2017

This paper examines the effect of giant oil and gas discoveries on foreign direct investment in developing economies. Across countries, we document a 58% increase in non-resource extraction FDI in the 2 years following a giant discovery, an event which is unpredictable due to the uncertainty of exploration. This effect is driven by a 30% increase in the number of projects and a 16% increase in targeted sectors. Mozambique's recent FDI boom provides a telling confirmation of this mechanism. Using project-level FDI data combined with multiple waves of household surveys and rm censuses we estimate that each FDI job results in 6.2 additional local jobs, linking the gas-driven FDI bonanza in Mozambique to widespread job creation.

JEL Codes: F21, F23, Q32, Q33

Keywords: Natural resources, investment, local multiplier

Reference: 199

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