Introduction to Resource Economics
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1 Introduction to Resource Economics Jan Abrell Centre for Energy Policy and Economics (CEPE) D-MTEC, ETH Zurich Introduction Resource Economics
2 Outline So far Introduction to Resource Economics Summary Introduction Resource Economics
3 So far Natural environment provides four basic services (basic life-support, amenity, waste sink, nat. resources) IPAT, Kaya s identity, EKC hypothesis Efficiency and optimality First and second welfare theorem Public goods: Non-rivalrous in consumption + non-excludability Externalities: Direct effects caused by consumption of one agent on utility/cost of another agent Introduction Resource Economics
4 The Two Rules of Environmental Regulation Target choice Instrument Choice Introduction Resource Economics
5 Pigouvian Tax Impose tax equal to marginal damage on emissions Tax is complete All individuals have to pay the same tax Generate income Double dividend and green tax reforms Introduction Resource Economics
6 Command and Control Impose emission limit for each polluter Cost efficiency requires knowledge of individual abatement cost function Uniform standards are cost-inefficient Create no income (except fines but then ecologically inefficient) Introduction Resource Economics
7 Emission Trading Regulator allocates permits to firms which are allowed to trade permits Initial allocation Grandfathering or auctioning Cost-efficiency as all firms see the same emission price Difference to emission tax Tax sets the price, permit trade sets the emission quantity Introduction Resource Economics
8 Coase Theorem Efficiency Hypothesis If property rights are fully assigned, bargaining leads to a Pareto-efficient internalization of external effects Invariance Hypothesis Independently who owns property rights, bargaining leads to Paretoefficiency Introduction Resource Economics
9 Liability Law Strict liability Efficient as Firms have same objective as regulator Each firm maximizes given its benefit function Damaged party compensated Inefficient under discounting Tortious liability Efficient if liability equal social optimal emission level Similar to Command and Control approach Damaged party usually not compensated Efficiency independent of discounting Introduction Resource Economics
10 Today: Introduction to Natural Resources Introduction Resource Economics
11 Outline So far Introduction to Resource Economics Summary Introduction Resource Economics
12 Resource: Definition Commodity only provided by the environment current consumption affects future availability Consequence Cannot be produced Intertemporal effects of consumption Introduction Resource Economics
13 Why to Study Resources? Many industries are based on resource extraction Environmental problems are often resource problems Slow regeneration of resources leads to irreversible effects Questions? What are the incentives to use resources? How are resource prices formed? What are the consequences of resource use? What is sustainable resource usage? Introduction Resource Economics
14 Types of Resources Stock resources Current use affects future availability Renewable Natural reproduction Non-renewable/exhaustible No reproduction Flow resource Current and future use unlinked Introduction Resource Economics
15 Exhaustible and Renewable Resources Exhaustible resources Infinite usage impossible Renewable resources Infinite usage possible if sustainably used Exhaustion if non-sustainably used Flow resources Infinite usage always possible Strong dependency on natural conditions Introduction Resource Economics
16 Exhaustible and Renewable Resources Sea with exhaustible resource Wood with renewable resource Production Consumption Introduction Resource Economics
17 Essential Resources Resource is essential if production/utility is minimal without resource use independently of usage of other commodities Example: Essential production resource Production function: Production without resources: All other resources are non-essential Introduction Resource Economics
18 Resources and Reserves Increasing degree of economic feasibility Economic Non- Economic Measured Identified resources Proven Estimated Reserves Likely Undiscovered resources Assumed (identified deposits) Resources Speculative (unknown deposits) Source: Faucheux and Noel (2001) Decreasing degree of geological assurance Introduction Resource Economics
19 Crude Oil: Proven Reserves & Consumption Proven Reserves Per Capita Consumption (tons) Source: BP Statistical Review of World Energy 2017 Introduction Resource Economics
20 Crude Oil: Reserve-to-Production Ratio Reserve to production ratio (static) Proven reserves / annual production Measure how many years exhaustible resources can be used before complete exhaustion Neglects technological progress and newly explored reserves Source: BP Statistical Review of World Energy 2017 Introduction Resource Economics
21 Natural Gas: Proven Reserves & Consumption Proven Reserves Per Capita Consumption (tons oil eq.) Source: BP Statistical Review of World Energy 2017 Introduction Resource Economics
22 Natural Gas: Reserve-to-Production Ratio Source: BP Statistical Review of World Energy 2017 Introduction Resource Economics
23 Coal: Proven Reserves and Reserve-to-Production Ratio Source: BP Statistical Review of World Energy 2017 Introduction Resource Economics
24 Outline So far Introduction to Resource Economics Summary Introduction Resource Economics
25 Classification of Resources Introduction Resource Economics
26 How long will Exhaustible Resources Last? Coal Oil Gas Reserve-to-production ratio [years] Running out of fossil fuel not an immediate threat Using all fossil fuels not an option Climate Change Source: Greenstone (2015): Introduction Resource Economics
27 Overview: Road to Resource Economics Exhaustible Resources How to extract resources in a socially efficient way? Can the market achieve an efficient solution? What determines the path of resource prices? What happens under imperfect competition? Renewable Resources What is sustainability? How to use resources in a sustainable way? Stock pollution Introduction Resource Economics
28 Literature Perman R., Y. Ma, J. McGilvray, and M. Common (2003): Natural Resource and Environmental Economics. Chapter 13 (Chapter 14 3rd edition). Introduction Resource Economics
29 Questions? Introduction Resource Economics
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