Thursday, January 28, 2016

New OxCARRE Research: Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox

A new OxCARRE research paper is available from

Armon Rezai (Vienna University of Economics and Business []) and
Frederick van der Ploeg (OxCarre,

writing on

Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox
Climate change must deal with two market failures: global warming and learning by doing in renewable use. The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax. Given that global carbon taxes remain elusive, policy makers have to use a second-best subsidy. In case of credible commitment, the second-best subsidy is set higher than the social benefit of learning. It allows the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use (weak Green Paradox). If policy makers cannot commit, the second-best subsidy is set to the social benefit of learning. It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher. Under first-best and second best with pre-commitment peak warming is 2.1 - 2.3 °C, under second best without commitment 3.5°C, and without any policy temperature 5.1°C above pre-industrial levels. Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best. Being able to commit brings this figure down to 7%.
Paper available here [] 

FT: Azerbaijan may be first to receive assistance from IMF/World Bank following oil price collapse

The FT reports: "IMF and World Bank move to forestall oil-led defaults. Team flies to Azerbaijan over possible $4bn emergency loan" See also here []. The country has been burning through it's foreign reserves, but it's SWF would still have ~ $35bn, 60% of GDP, according to the article.

We've noted the potential difficulties, and economic and political contradictions in Azerbaijan before.

Wednesday, January 27, 2016

Yahoo/Bloomberg: Norway to World: We're Sitting Out the Big Wealth Fund Selloff

Yahoo/Bloomberg have a piece in which Egil Matsen (new deputy central bank governor in charge of oversight of the investor and head of the department of economics at NTNU) discusses the strategy of Norway's Sovereign Wealth Fund in the current downturn of oil and equity markets. The strategy? Keep calm and carry on as if nothing is happening.

Read on here [].

Wednesday, January 20, 2016

VoxEU: The trade consequences of the oil price

Former OxCARRE researchers Pierre-Louis Vézina (King's College, London) and David van Below (Copenhagen Economics) write on VoxEU,

The trade consequences of the oil price
The price of oil rose to unprecedented highs in the 2000s, and its recent plunge took many by surprise. Although there are many consequences of such price fluctuations on the world economy, they are notoriously difficult to pin down. This column examines the trade consequences of varying shipping costs caused by oil price fluctuations. High oil prices are found to increase the distance elasticity of trade, making trade less global. The recent drop in oil prices could thus be a boon for globalisation.

Read on here 

Tuesday, January 19, 2016

New research: Natural Resource Booms in the Modern Era: Is the curse still alive?

Andrew Warner, IMF, writes on

Natural Resource Booms in the Modern Era: Is the curse still alive?

The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge economic rents - rents which, once invested, were widely expected to promote productivity growth in other parts of the booming economies, creating a lasting legacy of the boom years. This paper asks whether this has happened. To properly address this question the empirical strategy must look behind the veil of the booming sector because that, by definition, will boom in a boom. So the paper considers new data on GDP per person outside of the resource sector. Despite having vast sums to invest, GDP growth per-capita outside of the booming sectors appears on average to have been no faster during the boom years than before. The paper finds no country in which (non-resource) growth per-person has been statistically significantly higher during the boom years. In some Gulf states, oil rents have financed a migration-facilitated economic expansion with small or negative productivity gains. Overall, there is little evidence the booms have left behind the anticipated productivity transformation in the domestic economies. It appears that current policies are, overall, prooving insufficient to spur lasting development outside resource intensive sectors. 
Full paper here [pdf,]

It has a hint of a paper by former OxCARRE Researcher Alexander James [], "The Resource Curse: A Statistical Mirage" (Forthcoming, Journal of Development Economics) View

Monday, January 18, 2016

The Price of Oil and the Price of Carbon

OxCARRE associate Rabah Arezki and Maurice Obstfeld from the IMF, and also available on the IMFDirect blog here, write on

The Price of Oil and the Price of Carbon

By Rabah Arezki and Maurice Obstfeld

“The human influence on the climate system is clear and is evident from the increasing greenhouse gas concentrations in the atmosphere, positive radiative forcing, observed warming, and understanding of the climate system.”Intergovernmental Panel on Climate Change, Fifth Assessment Report

Fossil fuel prices are likely to stay “low for long.” Notwithstanding important recent progress in developing renewable fuel sources, low fossil fuel prices could discourage further innovation in and adoption of cleaner energy technologies. The result would be higher emissions of carbon dioxide and other greenhouse gases.

Policymakers should not allow low energy prices to derail the clean energy transition. Action to restore appropriate price incentives, notably through corrective carbon pricing, is urgently needed to lower the risk of irreversible and potentially devastating effects of climate change. That approach also offers fiscal benefits.

Low for long
Oil prices have dropped by over 60 percent since June 2014 (see Chart 1). A commonly held view in the oil industry is that “the best cure for low oil prices is low oil prices.” The reasoning behind this adage is that low oil prices discourage investment in new production capacity, eventually shifting the oil supply curve backward and bringing prices back up as existing oil fields—which can be tapped at relatively low marginal cost— are depleted. In fact, in line with past experience, capital expenditure in the oil sector has dropped sharply in many producing countries, including the United States. The dynamic adjustment to low oil prices may, however, be different this time around.

Oil prices are expected to remain lower for longer. The advent of shale oil production, made possible by hydraulic fracturing (“fracking”) and horizontal drilling technologies, has added about 4.2 million barrels per day to the crude oil market, contributing to a global supply glut. Shale oil will lead to shorter and more limited oil-price cycles. Indeed, shale requires a lower level of sunk costs than conventional oil, and the lag between first investment and production is much shorter. Furthermore, shale is still at a relatively early stage of its industry life cycle, where the scope for learning is substantial, as shown by production levels that have proven resilient thanks to phenomenal efficiency gains forced by the big drop in oil prices.

In addition, other factors are putting downward pressure on oil prices: change in the strategic behavior of the Organization of Petroleum Exporting Countries, the projected increase in Iranian exports, the scaling down of global demand (especially from emerging markets), the secular drop in petroleum consumption in the United States, and some displacement of oil by substitutes. These likely persistent forces, like the growth of shale, point to a “low for long” scenario, even after the supply legacy left by the high-price era of the 2000s has dissipated. Futures markets, which show only a modest recovery of prices to around $60 a barrel by 2019, support this view.

Natural gas and coal—also fossil fuels—have similarly seen price declines that look to be long-lived. Coal and natural gas are mainly inputs to electricity generation, whereas oil is used mostly to power transportation, yet the prices of all these energy sources are linked, including through oil-indexed contract prices. The North American shale gas boom has resulted in record low prices there. The recent discovery of the giant Zohr gas field off the Egyptian coast will eventually have repercussions on pricing in the Mediterranean region and Europe, and there is significant development potential in many other locales, notably Argentina. Coal prices also are low, owing to oversupply and the scaling down of demand, especially from China, which burns half of the world’s coal.

Renewables at risk

Technological innovations have unleashed the power of renewables such as wind, hydro, solar, and geothermal. Even Africa and the Middle East, home to economies that are heavily dependent on fossil fuel exports have enormous potential to develop renewables. For example, the United Arab Emirates has endorsed an ambitious target to draw 24 percent of its primary energy consumption from renewable sources by 2021.

Progress in the development of renewables could be fragile, however, if fossil fuel prices remain low for long. Renewables account for only a small share of global primary energy consumption, which is still dominated by fossil fuels—30 percent each for coal and oil, 25 percent for natural gas (see Table). But renewable energy will have to displace fossil fuels to a much greater extent in the future to avoid unacceptable climate risks. Unfortunately, the current low prices for oil, gas, and coal may provide scant incentive for research to find even cheaper substitutes for those fuels. There is strong evidence that both innovation and adoption of cleaner technology are strongly encouraged by higher fossil fuel prices. The same is true for new technologies for mitigating fossil fuel emissions.

The current low fossil-fuel price environment will thus certainly delay the energy transition. That transition—from fossil fuel to clean energy sources—is not the first one. Earlier transitions were those from wood/biomass to coal in the eighteenth and nineteenth centuries, and from coal to petroleum in the nineteenth and twentieth centuries. One important lesson is that these transitions take a long time to complete. But this time we cannot wait.

We owe to electric lighting the fact that there are still whales in the sea. Unless renewables become cheap enough that substantial carbon deposits are left underground for a very long time, if not forever, the planet will likely be exposed to potentially catastrophic climate risks.

Some climate impacts may already be discernible. For example, the United Nations Children’s Fund estimates that some 11 million children in eastern and southern Africa face hunger, disease, and water shortages as a result of the strongest El Niño weather phenomenon in decades. Many scientists believe that El Niño events, caused by warming in the Pacific, are becoming more intense as a result of climate change.

Getting the price of carbon right

Nations from around the world have gathered in Paris for the United Nations Climate Change Conference, COP-21, with the goal of a universal and potentially legally binding agreement on reducing greenhouse gas emissions. We need very broad participation to address fully the global “tragedy of the commons” that results when countries fail to take into account the negative impact of their carbon emissions on the rest of the world. Moreover, free riding by non-participants, if sufficiently widespread, can undermine the political will to action of participating countries.

The nations participating at COP-21 are focusing on quantitative emissions-reduction commitments (the Intended Nationally Determined Contribution, or INDCs). Economic reasoning shows that the least expensive way for each country to implement its INDC is to put a price on carbon emissions. The reason is that when carbon is priced, those emissions reductions that are least costly to implement will happen first. The IMFcalculates that countries can generate substantial fiscal revenues—revenues that would allow lower distorting taxes and new investments in the economy—by eliminating fossil fuel subsidies and levying carbon charges that capture the domestic damages caused by emissions. A tax on upstream carbon sources is one easy way to put a price on carbon emissions, although some countries may wish to use other methods, such as emissions trading schemes.

Countries that implement their INDCs through a domestic carbon price will reach their goals at lowest cost to themselves, but without global coordination on carbon prices, the cost to the world economy of whatever aggregate emissions reduction is achieved will be unnecessarily high. In order to maximize global welfare, every country’s carbon pricing should reflect not only the purely domestic damages from emissions (for example, health effects of the particulates associated with burning coal), but also the damages to foreign countries.

Setting the right carbon price will therefore efficiently align the costs paid by carbon users with the true social opportunity cost of using carbon. By raising relative demand for clean energy sources, a carbon price would also help to align the market return to clean-energy innovation with its social return, spurring the refinement of existing technologies and the development of new ones. And it would raise the demand for mitigation technologies such as carbon capture and storage, spurring their further development. If not corrected by the appropriate carbon price, low fossil fuel prices are not accurately signaling to markets the true social profitability of clean energy. While alternative estimates of the damages from carbon emissions differ, and it is especially hard to reckon the likely costs of possible catastrophic climate events, most estimates suggest substantial negative effects.

Direct subsidies to R&D have been adopted by some governments but are a poor substitute for a carbon price: they do only part of the job, leaving in place market incentives to over-use fossil fuels and thereby add to the stock of atmospheric greenhouse gases without regard to the collateral costs.

Politically, low oil prices may provide an opportune moment to eliminate subsidies and introduce carbon prices that could gradually rise over time toward efficient levels. However, it is probably unrealistic to aim for the full optimal price in one go. Global carbon pricing will have important redistributive implications, both across and within countries, and these call for gradual implementation, complemented by mitigating and adaptive measures that shield the most vulnerable.

The hope is that the success of the Paris conference opens the door to future international agreement on carbon prices. Agreement on an international carbon-price floor would be a good starting point in that process. Failure to address comprehensively the problem of greenhouse gas emissions, however, exposes all generations, present and future, to incalculable risks.

New OxCARRE Research Papers

Rabah Arezki [], Patrick Bolton [], Sanjay Peters [, Copenhagen Business School], Frederic Samama (Amundi Asset Management) & Joseph Stiglitz [, Columbia University] write on

From Global Savings Glut to Financing Infrastructure: The Advent of Investment Platforms

This paper investigates the emerging global landscape for public-private coinvestments in infrastructure. The creation of the Asian Infrastructure Investment Bank and other so-called “infrastructure investment platforms” are an attempt to tap into the pool of both public and private long-term savings in order to channel the latter into much needed infrastructure projects. This paper puts these new initiatives into perspective by critically reviewing the literature and experience with public private partnerships in infrastructure. It concludes by identifying the main challenges policy makers and other actors will need to confront going forward and to turn infrastructure into an asset class of its own.
Full paper at OxCARRE website here [pdf,].


Rabah Arezki [] and Thiemo Fetzer [University of Warwick] write on

On the Comparative Advantage of U.S. Manufacturing: Evidence from the Shale Gas Revolution

This paper provides the first empirical evidence of the newly found comparative advantage of the United States manufacturing sector following the so-called shale gas revolution. The revolution has led to (very) large and persistent differences in the price of natural gas between the United States and the rest of the world owing to the physics of natural gas. Results show that U.S. manufacturing exports have grown by about 6 percent on account of their energy intensity since the onset of the shale revolution. We also document that the U.S. shale revolution is operating both at the intensive and extensive margins.
Full paper at OxCARRE website here [pdf,].

OxCARRE Seminars this term

See also the OxCARRE website

Hilary Term 2016

OxCarre Seminar Series

Tuesdays at ***14.30hrs***
(unless otherwise stated*)
Seminar Room C,
Manor Road Building (Second Floor), Manor Road, Oxford OX1 3UQ
***Seminars will now take place at 14.30hrs

 26 January

Speaker:  Reed Walker (University of California, Berkeley)
Title:  TBC


2 February  3.00pm at Institute for New Economic Thinking, Eagle House, Walton Well Road, Oxford.   – this seminar is being held jointly with INET. 

Speaker:  Luca Taschini (Grantham Institute, LSE)
Title: Carbon Dating: When is it beneficial to link ETSs?

9 February 

Speaker:  Antoine Dechezleprêtre (LSE)
Title:  TBC

1 March

Speaker: Sweder van Wijnbergen (University of Amsterdam)
Title: TBA

8 March

Speaker: Kyle Meng (Univeristy of California, Santa Barbara)
Title:  Global Trade and Risk Sharing in a Spatially Correlated Climate



OxCarre  Lunchtime Seminar Series

Wednesdays at 12noon
(unless otherwise stated*)
Seminar Room D,
Manor Road Building (Second Floor), Manor Road, Oxford OX1 3UQ

3 February

Speaker: Jim Cust (NRGI)
Title: Common Pool Resources Across National Borders

17 February

Speaker: Tara Iyer (OxCarre)
Title: Factor Mobility and Optimal Monetary Policy in Commodity-Exporting Economies

24 February

Speaker:  Rick van der Ploeg (OxCarre)
Title:  The Shifting Frontier of Natural Resources

2 March

Speaker: Alex Schmitt (CESifo)
Title: TBC

9 March

Speaker: Gerhard Toews (OxCarre)
Title: TBC