Download Chapter 16

Chapter 16
RESOURCES
AND THE
ENVIRONMENT
AT THE
GLOBAL LEVEL
Modified for EC 375 by
Bob Murphy
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Natural Resource Concepts
• Nonrenewable Resources:
– Fixed quan+ty, when consumed gone forever.
– Change in current reserves = discovery of new stocks -­‐ deple+on of exis+ng stocks.
– Current reserves can also change due to technology or change in price.
– Example of oil reserves.
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Figure 16.1 World Crude Oil Production,
1900–2010
Sources: Jenkins (1977), p. 85 and Table 2, U.S. Department of Energy, Energy Information Administration (2007), Chapter 11, BP (2011).
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Table 16.1 World Crude Oil Production and
Reserves (Billions of Barrels)
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Natural Resource Concepts
• Renewable Resources:
– Some types (solar power) are not affected by use.
– Other types are affected by use but can regenerate:
ΔSt = St +1 − St = Gt − H t
where G is growth of the resource and H is the amount
harvested. Growth is function of the stock and the carrying
capacity of the environment. Carrying capacity is the largest
stock that nature can support if we don't harvest any of the
resource.
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Natural Resource Concepts
• Renewable Resources:
If S = carrying capacity, then G = 0 since there would be no
room for growth. A lower S implies higher growth when
close to carrying capacity. But if S is too low, then size of
stock itself matters--rate at which it can grow depends on
stock.
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Figure 16.2 Growth of a Renewable Resource
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Natural Resource Concepts
• Property Rights Over Resources:
– Tragedy of the Commons
– Establish property rights, yet not always possible.
– Also, need to have enforcement along with rules.
– Most difficult situa+on is when resource doesn’t fall under control of a single government:
• Ocean-­‐-­‐fishing stocks
• Atmosphere-­‐-­‐air pollu+on (deple+on of “unpolluted” air).
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Natural Resource Concepts
• Resources and Produc;on:
– Resource intensity:
R
I=
yL
where R is resource use, y is income per capita, L is labor
force (population).
R = IyL
R̂ = Iˆ + ŷ + L̂
ŷ = − Iˆ − L̂ if R is constant.
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Table 16.2 Energy Use by Different Country
Groups
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Natural Resources and Economic Growth
• Revising the Na;onal Income Accounts:
– Natural Capital declines over +me as use it up.
– Green GDP: Easy to compute for nonrenewable resources-­‐-­‐simply subtract value of resources used up in a given +me period.
– Compute value at in-­‐ground price (market price minus cost of extrac+on).
– World-­‐wide, this amounts to very liVle, though important for par+cular countries.
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Table 16.3 Calculation of the Value of
Depletion for the 14 Most Important Minerals
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Natural Resources and Economic Growth
• Revising the Na;onal Income Accounts:
– Renewable resources more difficult to account for as amount of natural capital is not reduced dollar for dollar by the amount of resource used. – May have no effect if use is less than maximum sustainable rate, or could have a larger than dollar-­‐for-­‐dollar effect if harves+ng at rate where resource can not regenerate itself.
– Environmental degrada+on should also be included, but difficult to account for as don’t have a “price” associated with the use of the resource as we do with nonrenewable resources.
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Natural Resources and Economic Growth
• Resource Prices:
– The exercise of compu+ng Green GDP involves using market prices-­‐-­‐value people put on the resource today. – But this price might not reflect value future genera+on would place on the resource. – If it is higher, then our approach understates the cost of resource deple+on.
– Prices also serve to induce subs+tu+on and technological innova+ons, so need to get them right!
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Natural Resources and Economic Growth
• Resource Prices:
– Price today should depend on expected future price, which reflects future scarcity. – Since suppliers have posi+ve +me preference-­‐-­‐preferring money today to money tomorrow-­‐-­‐in-­‐ground price theore+cally should rise at rate of interest (Hotelling, 1931).
– But mechanism can break down:
• Myopia-­‐-­‐rises faster than r so extract too much today.
• Property rights uncertainty-­‐-­‐similar to myopia.
• Cartels-­‐-­‐limit extrac+on so price might fall over +me if cartel’s power weakens.
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Natural Resources and Economic Growth
• Resource Prices:
– In prac+ce, usually impossible to observe the in-­‐ground price, so focus instead on actual market price.
– Further problem is that the rela+onship holds only in expecta+on-­‐-­‐actual price will generally differ from what was expected.
– Actual path for price combines expecta+ons with the effects of unexpected events.
– S+ll can learn something from path of actual prices.
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Figure 16.4 Natural Resource Prices,
1850–2010
Source: Cashin and McDermott (2002), The Economist industrial commodity price index.
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Figure 16.5 Real Price of Oil, 1861–2010
Source: BP (2011).
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Natural Resources and Economic Growth
• Resource Prices:
– Evidence of falling commodity prices suggests overstatement in measure value to future genera+ons of resource deple+on. – Thus, effect on Green GDP would be even smaller.
• Resource Limita;ons and Economic Growth
– Subs+tu+on and technological progress offset effect of resource limits on economic growth.
– Prices drive these forces.
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The Limits to Economic Growth
• Long history of pessimism:
– Malthus, Jevons, H.G. Wells.
– 1970s study “Limits to Growth:”
•
•
•
•
•
•
Used a sophis+cated computer model to make predic+ons.
Predicted dire consequences as resources ran out.
Completely wrong!
Technology and subs+tu+on have had important effects.
Did not predict con+nued advances in agricultural produc+vity.
But prices must reflect true scarcity to work properly!
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Figure 16.3 Growth Forecast from The Limits
To Growth
Source: Meadows et al. (1972), Figure 35.
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Growth and the Environment
• No Property Rights-­‐-­‐so tragedy of the commons is par;cularly acute.
• People who suffer seldom are same as those who benefit from pollu;ng-­‐-­‐nega;ve externality.
• The Environmental Kuznets Curve:
– Rich are willing to pay to get rid of pollu+on-­‐-­‐clean air is a “normal” good.
– Poor have low pollu+on not because they value clean air but because they have no way to trade higher pollu+on for more income.
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Figure 16.6 An Environmental Kuznets Curve
Source: Shafik (1994).
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Figure 16.7 Smoke Concentration in London,
1585–1940
Source: Brimblecomb (1977), Figure 5.
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Growth and the Environment
– Infamous Larry Summers memo at World Bank (1991) considers whether the Bank should encourage migra+on of dirty industry to poor countries:
• People in rich countries value reducing pollu+on more than people in poor countries because they earn higher wages (and can afford to reduce pollu+on) and because health costs of pollu+on are greater in rich countries where incidence of preventable disease is already very low. • The nega+ve effects of pollu+on vary with the amount of pollu+on already in the environment.
• Both rich and poor are made beVer off by moving these industries from rich to poor countries.
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Growth and the Environment
– This migra+on of industries has indeed occurred. – Has become part of trade nego+a+ons:
• Environmentalists want same limits on pollu+on in rich and poor countries.
• Favor preven+ng industries from changing countries rather than using other ways to reduce pollu+on.
• Developing countries oden object, as rather have jobs and pollu+on than neither!
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Growth and the Environment
• Global Warming:
– No evidence of an environmental Kuznets curve for carbon dioxide emissions.
– Effect is on people far away from source.
– Exact magnitude warming difficult to predict:
• Carbon dioxide concentra+on.
• Transla+on into temperature change.
– Economic effects also hard to predict as some areas will benefit and others lose.
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Figure 16.8 Average Global Temperatures
Source: www.giss.nasa.gov
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Figure 16.9 GDP per Capita versus Carbon
Dioxide Emissions per Capita
Sources: Heston, Summers, and Aten (2011), http://cdiac.ornl.gov/.
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Growth and the Environment
• Global Warming:
– Effect of reducing carbon dioxide emissions on growth:
• Kyoto Protocol requires 7% reduc+on below 1990 levels by 2012 for developed countries and no reduc+on for developing countries. • Effect on growth depends on same arguments we considered for natural resource scarcity.
• Resource intensity is key.
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Growth and the Environment
• Global Warming:
– Effect of reducing carbon dioxide emissions on growth:
•
•
•
•
Consider the U.S. in 2004-­‐-­‐16% above 1990 levels.
Need to thus reduce by 23% to get to level 7% below 1990.
Reduc+on of 2.7% per year.
Suppose GDP per capita grows at 2% and popula+on at 1% per year:
Iˆ = R̂ − ŷ − L̂
Iˆ = −0.027 − 0.02 − 0.01 = −0.057
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Growth and the Environment
• Global Warming:
– Effect of reducing carbon dioxide emissions on growth:
• So carbon dioxide intensity would need to fall by 5.75 per year to meet the target. • Large by historical standards but not unprecedented.
• Prices are key in inducing this.
• Currently the price is zero!
• Raising the price through say a carbon tax would spur progress on low-­‐emissions technologies and induce subs+tu+on. • Es+mated that per capita GDP in 2010 (today) would have been between 0.45% and 1.96% lower than otherwise.
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Chapter 16
Appendix:
Technological
Improvement
versus
Resource Depletion
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Figure 16.10 Relationship between Resource
Use and Growth
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