Tuesday, May 7, 2013

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.

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