Environmental 4: Resource Use Flashcards
What is the Hotelling rule?
The Hotelling rule states that the price of a stock resource should rise at the discount rate. This is a special case of an (intertemporal) law of one price.
Suppose a resource is publicly owned, and that consumption discount rates are below the rate of return on investment. How will price paths change?
Prices will rise more slowly, since the public owner will price according to the consumption discount rate r. But, since the overall resource usage must be the same, prices must start higher and end lower.
Suppose there is a cost to extracting resources that depends only on the amount extracted, not the stock left. How does the Hotelling rule change, if it does?
It doesn’t. Benefits of extraction in each period are all offset by the same amount, so there is no change to the arbitrage equation.
Why have mineral price paths not tended to strongly support the Hotelling rule?
- Shocks to estimated resource abundance
- Technological change to costs
- Demand shocks
- Extraction rates in some minerals are primarily determined by engineering considerations - it is the choice to drill a new well that is subject to the Hotelling rule.
Why can a delayed tax lead to a weak green paradox?
Producers will move production from the future to the present, in order to equalise their real returns over time. Emissions will therefore increase in the short-term.
When should we be particularly worried about weak green paradoxes?
- If pollutant stocks decay quickly, high early emissions may mean thresholds are passed and damages are higher.
- If adaptation takes a significant amount of time, rapid change may be dangerous.
What empirical evidence is there for green paradoxes?
Anticipation of stricter climate policy in the future may already be driving front-loading of emissions, but it is difficult to test for this effect specifically.
Lemoine 2013 finds that prices for coal and gas jumped after the unexpected failure of the US cap-and-trade scheme; but Di Maria et al 2013 finds that the short time between announcement and implementation of the SO2 scheme precluded any green paradox effect.
Why, if natural and physical capital are imperfect or perfect substitutes, is sustainable consumption possible?
With perfect substitution, the resource can always be swapped for capital. The depletion of exhaustible resources is therefore unproblematic.
If they are imperfect substitutes, declining resource availability means we will need more capital. This, however, can always be accumulated with savings from the usage of resources.
Why is sustainable consumption impossible if natural and physical capital are complements?
If they are complements, the resource is essential to production. Since it is exhaustible, any usage is not sustainable, since any nonzero usage will eventually lead to exhaustion.
What is the Hartwick rule?
If we invest resource rents into physical capital, at least constant consumption can be maintained if sigma≥1.
Why does Dasgupta think substitution possibilities are very extensive in the long-run?
As resource are depleted, the incentives for new recycling opportunities, substitute technologies or efficiency gains grow quickly. So, even for resources we cannot currently substitute away from, we may expect substitution to become possible.
If clean air is essential to productive processes, does this imply natural capital is essential to production and sustainability is therefore impossible?
No. Clean air is not used consumptively in production processes. Continuous usage is therefore sustainable.
