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Resource Extraction and Uncertain Tipping Points

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Abstract

A global planning problem is analyzed for extracting an exhaustible resource like oil when resource extraction – the only source for current consumption – also generates additions to the stock of GHGs that influence the likelihood of hitting a threshold representing climate change. We derive conditions for optimal extraction when we take into account joint emissions that accumulate to a stock that is governing the planner’s beliefs of facing a climate change that will involve a loss in the production capacity of the global economy. Except for “annuity of the continuation payoff”, which is the stationary rate of welfare after a climate change, the optimality conditions are very similar to the results found in Loury (1978) - where optimal extraction of a non-renewable resource of unknown size was analyzed. Not surprisingly we find that extraction has a cost (“environmental cost”) beyond the standard opportunity cost (“resource rent”), implying a lower rate of extraction as long as no threshold has been hit, compared to the risk-free case. Such saving has an expected rate of return along an optimal strategy should be balanced against the standard required rate of return - the Keynes- Ramsey-Cass-Koopmans-condition.

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  • Vislie, Jon, 2017. "Resource Extraction and Uncertain Tipping Points," Memorandum 03/2017, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2017_003
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    More about this item

    Keywords

    Resource extraction; tipping point uncertainty; climate change;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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