Working Papers

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
market.

JEL Codes: H22, Q42, Q48, Q58

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

Reference: 212

Individual View

Authors: Anouk Rigterink

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
data.

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

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

Reference: 210

Individual View

Authors: Anja Tolonen

May 2018

JEL Codes: O12; O13; J16

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

Reference: 209

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: Elizabeth Baldwin, Yongyang Cai, Karlygash Kuralbayeva

Jan 2018

We investigate how irreversibility in “dirty” and “clean” capital stocks affects optimal climate policy, 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”. As such the “Green Paradox” has a converse if we focus on demand side capital stock effects. We also show that the optimal subsidy increases with the deployment rate: our “acceleration effect”. Considering second-best settings, we show that, although carbon taxes achieve stringent targets more efficiently, in fact renewable subsidies deliver higher welfare when policy is more mild.

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

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

Individual View

Authors: Masashige Hamano, Vessel N Vermeulen

Oct 2017

How is a firm's ability to export affected by changes in domestic trade costs? In particular we focus on the interation between firms and ports to answer how strongly exports from one ports are affected by changes in the cost of exporting at neighbouring ports?  To answer these questions we extend the standard trade model with heterogeneous firms to have a multiple port structure where exporting is subject to port specific local transportation costs and port specific fixed export costs as well as international bilateral trade costs.  We derive a gravity equation with multiple ports and show that gravity distortion due to firms heterogeneity is conditional on port comparitive advantage and resulting substitution of export across differentiated ports.  We present evident of the substitution effect using the 2011 Great East Japan Earthquake and following tsunami, which suggest that about 50% of the exports was substituted to other ports following the disaster.

JEL Codes: F14, O18, R1

Keywords: firm heterogeneity, entensive margins, transportation costs, fixed costs, natural disasters

Reference: 198

Individual View

Authors: Rick Van der Ploeg, Armon Rezai

Sep 2017

A simple rule for the optimal global price of carbon is presented, which captures the geo-physical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can derive the end of the carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2°C upper limit on global warming. Steady increases in energy efficiency do not affect the optimal price of carbon, but postpones the carbon-free era somewhat and if technical progress in renewables and economic growth are strong leads to substantially lower cumulative emissions and lower peak global warming.

JEL Codes: H21, Q51, Q54

Keywords: social cost of carbon, climate ethics, prudence, carbon budget, peak warming, end of carbon era, stranded assets, simple rules, energy efficiency

Reference: 197

Individual View

Authors: Roland Hodler, Anna Bruderle

Sep 2017

Oil spills can lead to irreversible environmental degradation and pose hazards to human health.  We are the first to study the causal effects of onshore oil spills on neonatal and infant mortality rates.  We use spatial data from the Nigerian Oil Spill Monitor and the Demographic and Health Surveys, and rely on the comparison of siblings conceived before and after nearby oil spills.  We find that nearby oil spills double the neonatal mortality rate. These effects are fairly uniform across locations and socio-economic backgrounds. We also provide some evidence for negative health effects of nearby oil spills on surviving children.

JEL Codes: I10, I18, J13, Q53

Keywords: Nigeria, infant mortality, child health

Reference: 196

Individual View

Authors: Rick Van der Ploeg

Sep 2017

Cumulative emissions drive peak global warming and determine the safe carbon budget compatible with staying below 2oC or 1.5oC. The safe carbon budget is lower if uncertainty about the transient climate response is high and risk tolerance low. Together with energy costs this budget determines the constrained welfare-maximizing carbon price and how quickly fossil fuel is replaced by renewable energy and how much of it is abated. This price is the sum of a gradual damages component familiar from the unconstrained optimal carbon price highlighted in economic studies and a Hotelling component for the additional price needed to ensure that the safe carbon budget is never violated familiar from IAM studies. If policy makers ignore damages, as in the cost-minimizing temperature constraint literature, a more rapidly rising carbon price results. The alternative of adjusting damages upwards to factor in the peak warming constraint leads initially to a higher carbon price which rises less rapidly.

Keywords: peak warming target, climate uncertainty, risk tolerance, Pigouvian damages, Hotelling rule, carbon price

Reference: 195

Individual View

Authors: Thomas McGregor

Sep 2017

This paper investigates the link between commodity price movements and risk premiums in resource-dependent,developing economies. I develop a stochastic general equilibrium model of a small open economy that receives a stream of resourc erevenues.The government sells bonds to foreign investors which it can renege on in the future, at some cost, whilst international investors form expectations on the likelihood of sovereign default. This delivers an endogenous risk premium which is inversely related to the price of oil.The model is able to explain a large proportion of the business cycle fluctuations in interest-rate spreads in resource dependent developing economies. I then ask how specific structural features of developing economies affect the relationship between commodity prices and the optimal price of sovereig ndebt, including:a higher dependence on natural resource revenues, impatient consumers and governments,a higher degree of risk-aversion, and a lower ability to substitute consumption inter-temporally. Including them in the model significantly improves the ability of the model to explain the key macroeconomic co-movements in a resource rich, developing economy context. Model simulations reveal an interesting policy insight. An endogenous risk premium that is driven by falling oil prices, provides an additional rationale for a volatility fund in which liquidity buffers are accumulated to manage debt repayments. These buffers should be larger the stronger the link between oil prices and the domestic economy is, the more impatient policymakers are and the more willing they are to substitute current for future consumption.

JEL Codes: E13, E32, E44, F34, O11, O13, O16, H63

Keywords: Pricing sovereign debt, default, natural resources, BBC, volatility fund

Reference: 194

Individual View

Authors: James Cust, David Mihalyi

Jul 2017

Oil discoveries can constitute a major positive and exogenous shock to economic activity, but the resource curse hypothesis would suggest they might also be detrimental to growth over the long run. This paper utilizes a new methodology for estimating growth underperformance to examine the extent to which discoveries depress the growth path of a country following a discovery and prior to production starting. The study finds causal evidence of a significant negative effect on short-run growth and growth relative to counter-factual forecast growth in countries with weak institutions;creating growth disappointments prior to private and public resource windfalls. This effect is termed the presource curse. For a giant oil or gas discovery, between 1988 to 2010, the study estimates an average growth disappointment effect of 0.83 percentage points, measured as the average annual gap between forecast and actual growth over the five years following a discovery. Further,the estimate defect varies by the size of the discovery, increasing to a 1.77 percentage points gap in the case of super giant discoveries. The estimated effect is inversely related to the quality of political institutions, and driven by countries with lower institutional quality at the time of the discovery, consistent with the similar long-run results documented in the resource curse literature. For countries with below-threshold institutional quality, the growth disappointment effect is larger, measured as 1.35 percentage points in annual terms.  There is no measured growth disappointment effect for countries with strong institutions. Using the synthetic control method we confirm our findings for a selection of countries above and below the institutional quality threshold. The findings suggest that studies of the resource curse that focus only on the effects of resource exploitation or examine only long-run growth effects may overlook important short-run growth disappointments following discoveries, and the way countries respond to news shocks.

JEL Codes: O40, O43, Q33, Q35

Keywords: rousource curse, economic growth, forecasting, forecast errors, news shocks, institutions

Reference: 193

Individual View

Authors: Rick Van der Ploeg, Bas Jacobs

Jun 2017

This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods if preferences for commodities are not of the Gorman (1961) polar form. However, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax if preferences for commodities are of the Gorman polar form even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax if preferences are Gorman polar. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but optimal corrective taxes deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

JEL Codes: H21, H23, Q54

Keywords: redistributive taxation, corrective pollution taxation, Gorman polar form, Stone-Geary preferences, PIGLOG preferences, green tax reform

Reference: 191

Individual View

Authors: James Cust, Torfinn Harding, Pierre-Louis Vezina

Jun 2017

Oil and gas extraction may lead to the Dutch disease, i.e. the crowding ot of the manufacturing sector due to rising wages when labor is drawn to the expanding extraction and services sectors. In this paper we exploit the fact that oil and gas discoveries contain an element of chance as well as oil price fluctuations to capture random variation in oil and gas windfalls across Indonesia and identify their effects on manufacturing firms. We find that oil and gas windfalls cause wage growth but that the firm exit rate is unaffected. Firms’ output and labor productivity increase along with wages suggesting where firms are able to respond to booming local demand, and raise productivity in response to upward wage pressures, they can overcome the crowding-out effects from resource windfalls.

JEL Codes: O13, O14, Q32

Keywords: Dutch disease, firm level, Indonesia, manufacturing firms, oil and gas

Reference: 192

Individual View

Global warming can be curbed by pricing carbon emissions and thus substituting fossil fuel with renewable energy consumption. Breakthrough technologies (e.g., fusion energy) can reduce the cost of such policies. However, the chance of such a technology coming to market depends on investment. We model breakthroughs as an irreversible tipping point in a multi-country world, with different degrees of international cooperation. We show that international spill-over effects of R&D in carbon-free technologies lead to double free-riding, strategic over-pollution and underinvestment in green R&D, thus making climate change mitigation more difficult. We also show how the demand structure determines whether carbon pricing and R&D policies are substitutes or complements.

JEL Codes: D2, D90, H23, Q35, Q38, Q54, Q58

Keywords: global warming, carbon pricing, renewable R&D, tipping point, international cooperation, non-cooperative policies, feedback Nash equilibrium

Reference: 190

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