Why Climate Skeptics Should Reduce Emissions

OxCarre WP: 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.

"Why nations fail" on the resource curse

... cross-national evidence suggests countries with poor institutions, such as lack of checks and balances or high levels of corruption, experience economic contractions when they discover natural resources? The question is why. 

Read more...

Pipeline poker

The Economist: East Africa is in danger of throwing away part of its new-found oil wealth

Public Investment in Resource-Abundant Developing Countries

IMF Economic Review: Natural resource revenues provide a valuable source to finance public investment in developing countries, which frequently face borrowing constraints and tax mobilization problems. This paper develops a dynamic stochastic model to analyze the macroeconomic effects of investing resource revenues, making explicit the role of public investment inefficiency, absorptive capacity constraints, Dutch disease, and financing needs to sustain capital. Revenue exhaustibility raises medium-term issues of how to sustain capital built during a windfall, while revenue volatility raises short-term concerns about macroeconomic instability. Using the model, country applications show how combining public investment with a resource fund—a sustainable investing approach—can address the problems associated with exhaustibility and volatility. The applications also demonstrate how the model can be used to determine the appropriate magnitude of the investment scaling-up (accounting for the financing needs to sustain capital) and the adequate size of a stabilization fund (buffer).

Why Nations Fail: The resource curse in Cameroon

Acemoglu and Robinson blog: Oil was discovered in Cameroon in 1977. At the time the economy had been growing well based on coffee and cocoa exports. The arrival of oil triggered a boom with the economy growing at an average rate of 9.4% between 1977 and 1986, but then the slide began. Positive turned negative, and by 1993 income per capita was half of the 1986 level. Though growth then resumed, Cameroon is still about 1/3 poorer than it was in 1986. This poor growth experience went along with deteriorating human development. Life expectancy fell from 56 to 50 years between 1995 and 2006 and infant mortality increased by almost 30% over the same period. Primary and secondary school enrollments declined by 10%. A lot of these declines are due to a collapse of public investment...

Are Methane Hydrates Really Going to Change Geopolitics?

The Atlantic: The right way to understand the potential of unconventional fuels like methane hydrates and tight oil is to closely examine their production rates and their prices. If these fuels can be produced at large scales and profitable prices, they very well might influence geopolitics and economics in the ways that Charles C. Mann speculates in his recent Atlantic cover story. If they cannot, then it truly doesn't matter how much of those resources may exist underground and in the ocean floor.

Revenue Watch 2013 Resource Governance Index

The lives of over a billion citizens could be transformed if their governments managed their oil, gas and minerals in a more open, accountable manner, according to the Resource Governance Index released today by the Revenue Watch Institute.

From this week's Economist

• Brazil’s oilfields: Back in business
• Business in the Democratic Republic of Congo: Murky minerals
• Oil markets fall under the suspicion of price-fixing on a global scale

FDI, Natural Resources and Institutions

IGC Policy Brief: 

Foreign direct investment (FDI) is a good source of finance for long-term economic growth. It is especially important for its potential to transfer knowledge and technology, create jobs, boost overall productivity and enhance competitiveness in host countries. Many international development agencies, such as the World Bank, consider FDI as one of the most effective tools in the global fight against poverty, and therefore actively encourage poor countries to pursue policies that will encourage FDI flows. It is therefore important to determine the factors that affect FDI flows to developing countries.

This policy brief examines the interaction between FDI, natural resources and institutions. It answers three questions: (i) Do natural resources crowd out FDI - i.e., is there an FDI-natural resource curse?; (ii) Do institutions mitigate the adverse effect of natural resources on FDI? (iii) Can institutions completely neutralise the FDI-natural resource curse?

Discounting under Disagreement

NBER WP by Heal and Millner: A group of time consistent agents has access to a productive resource stock whose output meets their consumption needs. The agents disagree about the appropriate pure rate of time preference to use when choosing a consumption policy, and thus delegate the management of the resource to a social planner who allocates consumption efficiently across individuals and over time. We show that the planner's optimal policy is equivalent to that of a representative agent with a time varying rate of impatience. The representative agent's time preferences depend on the distribution of time preferences in the group, on the agents' tolerance for consumption fluctuations, and on the productivity of the resource. The representative agent's rate of impatience coincides with that of the individual with the lowest rate of impatience in the long run, and under plausible conditions is monotonically declining. In the work-horse case of iso-elastic felicity functions and Gamma distributed rates of impatience, analytic solutions are possible, and the representative agent has hyperbolic time preferences. We thus provide a normative justification for the use of declining rates of time preference in dynamic welfare analysis.

Solar is about to Change our World

Monetary Realism: I've been getting into Solar lately – the fall in prices has been absolutely shocking over the last 2-4 years. We are seeing price drops closer to 20% per year after several decades at 6% price drops per year. 6% year is a fantastic rate of decreases, but 20% is simply astonishing. 20% is an impressive number, but putting it into context will make your jaw drop with astonishment. My calculations show that if solar maintains 5 more years at current 23% rates per year price drops, solar power will be cheaper than using existing coal plants. That’s right – it will be cheaper to build new solar plants than to use existing coal plants. It sounds absolutely crazy. But it seems true looking at the data...

Oil for Food: The Global Food Crisis and the Middle East

New book:  In the wake of the global food crisis of 2008 Middle Eastern oil producers announced multi-billion investments to secure food supplies from abroad. Often called land grabs, such investments are at the heart of the global food security challenge and put the Middle East in the spotlight of simultaneous global crises in the fields of food, finance, and energy. Water scarcity here is most pronounced, import dependence growing, and the links between oil and food are manifold ranging from the economics of biofuels to climate change and the provision of crucial input factors like fuels and fertilizers. In the future, the Middle East will not only play a prominent role in global oil, but also in global food markets, this time on the consumption side.
In Oil for Food, Eckart Woertz analyzes the geopolitical implications behind the current investment drive of Arab Gulf countries in food insecure countries like Sudan or Pakistan. Having lived in Dubai for seven years, and drawing on extensive archival sources and interviews, he gives the inside story of how regional food security concerns have developed historically, how domestic agro-lobbies shape policy making, and how the failed attempt to develop Sudan as an Arab bread-basket in the 1970s carries important lessons for today's investments drive.
The book argues against the media hype that has been created around land grabs and analyzes why there has been such a gap between announced projects and their actual implementation. Instead, it calls for a revision of Gulf food security policies and suggests policy alternatives. It is essential reading for academics interested in the political economy of the Gulf region and for practitioners in governments, media, and international organizations who deal with contemporary food security and energy issues.

Cumulative Carbon Emissions and the Green Paradox

OxCarre paper by van der Ploeg: 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.

Era of Big Oil secrecy is over

Daniel Kaufmann:

Earlier this month, the EU took a decisive step towards transparency: It agreed to mandate publicly-listed European companies as well as large private firms to disclose their payments to governments for oil, gas and mining projects. This transparency is crucial in the fight for better governance of resource-rich countries. It will empower citizens with information about the amount of money their governments receive, helping them to monitor how this money is ultimately used and to deter corruption.

Opacity has long ties with corruption, and both are detrimental to growth. Our research shows that countries that control corruption and improve governance can triple their incomes per capita in the long term...

The EU rules are part of the international community’s response to the opacity challenge, and are modeled after U.S. rules the Securities and Exchange Commission (SEC) released last August...

Major multinational oil companies have been trying to water down these requirements on both sides of the Atlantic...

Are the world’s financial markets carrying a carbon bubble?

A new report by the Carbon Tracker Initiative:
Regulators should:

• Require reporting of fossil fuel reserves and potential CO2 emissions by listed companies and those applying for listing.
• Aggregate and publish the levels of reserves and emissions using appropriate accounting guidelines.
• Assess the systemic risks posed to capital markets and wider economic prosperity through the overhang of unburnable carbon
• Ensure financial stability measures are in place to prevent a carbon bubble bursting.

Africa, stop digging holes for the West

Mail&Guardian: For at least two generations, African leaders and policymakers have recoiled from the 300-year model of African natural-resource development. Simply put, the model was based on Africans, originally as slaves and later as paid porters, carrying ivory to the coast for ­Europeans and Asians to cut and process. The products may have changed, but not the model. Despite the fervent desire of African policymakers to add value to raw materials, whether it is copper, gold or coffee, it has simply never materialised. Yet despite this experience, the notion of adding value to raw materials remains an article of faith in Africa and almost all national and regional industrial policy statements make some mention of it...

Optimal resource extraction under mitigation and adaptation

Mimeo: Recent literature emphasises that society shall tackle the problem of climate change by pursuing a mix of both mitigation and adaptation activities. The paper derives society’s intertemporal welfare maximizing extraction rule for an exhaustible resource when using up the resource in production intensifies the greenhouse effect. We give society the possibility to build up adaptation capital which reduces the occurring output losses from global warming. We find that the market extracts the resource too fast and that the private build-up of adaptation capital is inefficient if the costs and benefits from adaptation are not purely private. If society fails to ensure efficient adaptation, the global environmental externality becomes more severe. We investigate the linkage between both market failures and provide policy measures to correct for them simultaneously.

The generalized resource curse

interfluidity: A useful way to understand the pickle we’re in, I think, is that we are suffering from the so-called “resource curse”. If you are unfamiliar with the phrase, “resource curse” refers to the regularity with which countries “blessed” with abundant natural resources end up as dystopian polities with dysfunctional economies. Nigeria has a lot of oil but no one wants to live there...

'Peak Oil' Is Back, but This Time It's a Peak in Demand

Bloomberg Businessweek: Remember peak oil? It’s the theory—current about a decade ago—that global oil production would soon top out, leading to an inexorable rise in prices. Reports and books painted a grim picture of the effects this would have on the global economy; as fracking and seabed discoveries have unlocked new sources of the fossil fuel, most have dismissed peak oil as a flawed concept.

Now a pair of reports from energy-sector analysts say we’re approaching peak oil from the opposite direction: demand.

Citigroup’s commodities division’s Seth M. Kleinman and colleagues write that “oil demand is approaching a tipping point” (PDF) and should level off by 2020. The Boston Company’s Global Natural Resources Team was less certain and direct in its forecast (PDF), indicating that Asia’s consumption growth rate would have to double to make up for shrinking North American demand, and flattening demand is among likely scenarios for the future.

Such stances are at odds with the U.S. Energy Information Agency’s prognosis, which sees global demand growing from 98 million barrels a day in 2020 to 112 million in 2035.

Citi acknowledges this “broad consensus,” but points to “several developments” that “give reason to question the consensus and raise the possibility that the tipping point for oil demand may come sooner” rather than later...

The Global Energy Outlook

NBER WP: We explore the principal trends that are shaping the future landscape of energy supply, demand, and trade. We take a long-term view, assessing trends on the time scale of a generation by looking 25 years into the past, taking stock of the current situation, and projecting 25 years into the future. We view these market, technology, and policy trends at a global scale, as well as assess the key regional dynamics that are substantially altering the energy scene. The shift from West to East in the locus of energy growth and the turnaround of North American gas and oil production are the most pronounced of these currents. Key uncertainties include the strength of economic and population growth in emerging economies, the stringency of future actions to reduce carbon emissions, the magnitude of unconventional natural gas and oil development in non-OPEC countries, and the stability of OPEC oil supplies.

Energy Production and Health Externalities: Evidence from Oil Refinery Strikes in France

NBER WP: This paper examines the effect of energy production on newborn health using a recent strike that affected oil refineries in France as a natural experiment. First, we show that the temporary reduction in refining lead to a significant reduction in sulfur dioxide (SO2) concentrations. Second, this shock significantly increased birth weight and gestational age of newborns, particularly for those exposed to the strike during the third trimester of pregnancy. Back-of-the-envelope calculations suggest that a 1 unit decline in SO2 leads to a 196 million euro increase in lifetime earnings per birth cohort. This externality from oil refineries should be an important part of policy discussions surrounding the production of energy.

Aid and the Rise and Fall of Conflict in the Muslim World

New draft by Ahmed and Werker: The conflict following the Arab Spring is not the first wave of civil war in the Muslim world in recent time. From the mid-1980s to the end of the century, an average of one in ten predominantly-Muslim countries experienced violent civil war in any given year. We provide a partial explanation for this statistic: a foreign aid windfall to poor, non-oil producing Muslim countries during the twin oil crises of the 1970s allowed the recipient states to stave off rebellion. When oil prices fell in the mid-1980s, the windfall ended, and the recipient countries experienced a significant uptick in civil war. We test this hypothesis using a natural experiment of oil price changes which favored Muslim countries over non-Muslim countries. We then construct a formal model consistent with the stylized facts of this historical episode: oil-rich donors are generous according to the price of oil; and recipients are peaceful with no aid or high levels of aid, and otherwise experience civil war. The model generates further predictions which are consistent with the data.