Climate Change and Resource Rents

With the next IPCC report coming out, there's been more reporting on climate change issues.  Brad Plumer over a Wonkblog has nice summary that helps to illustrate how much climate change is already "baked in" so to speak.

I'd like to comment one point.  Brad writes "Humans can only burn about one-sixth of their fossil fuel reserves if they want to keep global warming below 2ºC."

I'd guess some might quibble with the measurement a bit, since viable reserves depends on price and technology, plus many unknowns about much fossil fuel there really is down there.  But this is probably in the ballpark, and possibly conservative.

Now imagine you own a lot of oil, coal and/or natural gas, you're reading Brad Plumber, and wondering what might happen to climate policy in the coming years.  Maybe not next year or even in the next five or ten years, but you might expect that eventually governments will start doing a lot more to curb fossil fuel use.  You might then want to sell your fossil fuels now or very soon, while you can.   If many resource owners feel this way, fossil fuel prices could fall and CO2 emissions would increase.  

This observation amounts to the so-called "green paradox."  Related arguments suggest that taxing carbon may have little influence on use, and subsidizing renewable fuels and alternative technologies, without taxing or otherwise limiting carbon-based fuels, might make global warming worse, since it could push emissions toward the present.

Research on these ideas, mostly theoretical, is pretty hot in environmental economics right now.  It seems like half the submissions I manage at JEEM touch on the green paradox in one way or another.  

All of it has me thinking about a point my advisor Peter Berck often made when I was in grad school. At the time, we were puzzling over different reasons why prices for non-renewable resources--mostly metals and fossil fuels--were not trending up like Hotelling's rule says they should.  Peter suggested that we may never use the resources up, because if we did, we'd choke on all the pollution.  Resource use would effectively be banned before all of it could be used. If resource owners recognized this, they'd have no incentive to hold or store natural resources and the resource rent (basically the intrinsic value based on its finite supply) would be zero, which could help explain non-increasing resource prices.

For all practical purposes, Peter understood the green paradox some 15-20 years ago.  Now the literature is finally playing catch up.  


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