Renewable resource management with stock externalities: Coastal aquifers and submarine groundwater discharge

We model coastal groundwater management and its effects on submarine groundwater discharge, nearshore marine water quality, and marine biota. Incorporating the stock externality effects on nearshore resources increases the optimal sustainable steady-state levels of both the aquifer head and the stock of a keystone native algae species. Numerical simulations are illustrated using data from the Kuki’o region on the Island of Hawaii. Two different approaches for incorporating the nearshore resource are examined. Including algae's market value in the objective function results in only slightly lower rates of groundwater extraction. When a minimum constraint is placed on the stock of the keystone species, however, greater conservation may be indicated. The constraint also results in non-monotonic paths of water extraction, head level, and marginal opportunity cost of water in the optimal solution.     

Effects of instantaneous groundwater availability on irrigated agriculture and implications for aquifer management

Groundwater is an important input for agricultural production in many parts of the world. Aquifer depletion has been shown to affect the rate that groundwater can be extracted from an aquifer. In this paper, we develop an analytical framework that accounts explicitly for the effects of limited instantaneous groundwater extraction rate (well capacity) on a producer's irrigation decisions. We show that limited well capacities can affect the producer’s groundwater use and profit. We draw three important insights from these findings. First, we demonstrate that the price elasticity of demand for groundwater is higher for lower well capacities. Second, farmers’ irrigation decisions are non-monotonic with respect to well capacity and climate conditions. Under a drier climate, producers with greater well capacities increase their groundwater use, and producers with lower well capacities reduce their water use. Third, through numerical analysis, we show that considering spatial heterogeneity in well capacities is important for estimating the cost-effectiveness and distributional impacts of groundwater management policies. Our results shed new light on the importance of extraction capacity for groundwater management policies and the potential impacts of climate change on agricultural production.     

Depletion,climate, and the incremental value of groundwater

Groundwater provides vital inputs to crop production and contributes to rural economies throughout the world. Research on the economic benefits associated with groundwater resources has typically focused on the impacts of groundwater availability on the profitability of agricultural production or on the non-market benefits associated with groundwater quality for human consumption. In this research, we use stated-preference methods to investigate the total economic value to agricultural producers of an increase in groundwater availability in the Ogallala Aquifer region. The contingent valuation method allows for estimation of values beyond agricultural profitability, including non-market values such as the ability to leave additional groundwater to future generations. We find a median willingness to pay (WTP) for an additional 100 gallons per minute of well capacity of $77 per well, and that this estimate depends strongly on current well capacity and climate conditions. For counties in hotter and drier regions of the aquifer with low well capacity, median WTP is significantly higher. These results are then used in conjunction with projections of future climate and groundwater availability to generate predicted changes in the WTP for additional groundwater across the aquifer. This research provides important feedback on how the benefits of additional groundwater availability are predicted to change as groundwater resources are diminished in a changing climate.     

Climate change,fossil fuel prices and depletion: The rationale for a falling export tax

This paper examines how world prices affect depletion of exhaustible fossil fuels for export and the role of an export revenue tax in curbing depletion. Both effects are studied for a small open economy affected by climate change. We find that setting an export revenue tax rate to fall over time at the marginal social cost of depletion due to lower productivity from climate change encourages a resource exporter to leave an optimal stock in the ground – unextracted and unburnable. Growing prices during the past decade similarly curb depletion. Falling prices bring forward extraction. Because production is independent of consumption, the marginal social cost is independent of utility parameters which are difficult to estimate. Slowing fossil fuel extraction and the effective export of emissions is a contemporary challenge for climate policy. Our findings identify both why an export revenue tax should decline over time and an estimable target rate of decline to help meet this challenge amid changing world prices.     

Preparing for catastrophic climate change

We study optimal adaptation to climate change when the harmful consequences of global warming are associated with uncertain occurrence of abrupt changes. The adaptation policy entails the accumulation of a particular sort of capital that will eliminate or reduce the catastrophic damage of an abrupt climate change when (and if) it occurs. The occurrence date is uncertain. The policy problem involves balancing the tradeoffs between the (certain) investment cost prior to occurrence and the benefit (in reduced damage) that will be realized after the (uncertain) occurrence date. For stationary economies the optimal adaptation capital converges monotonically to a steady state. In most cases, investment begins immediately. However, if the initial adaptation capital exceeds a pre-specified threshold level, which lies above the optimal steady state, investment is delayed while the capital stock decreases (due to depreciation) and commences only when it reaches this threshold level. For growing economies the optimal adaptation capital stock approaches the maximal economic level above which further accumulation is ineffective.     

Global warming and livestock husbandry in Kenya: Impacts and adaptations

This paper examines the economic impact of climate change on livestock production in Kenya. We estimate a Ricardian model of net livestock incomes and further estimate the marginal impacts of climate change. We also simulate the impact of different climate scenarios on livestock incomes. The Ricardian results show that livestock production in Kenya is highly sensitive to climate change and that there is a non-linear relationship between climate change and livestock productivity. The estimated marginal impacts suggest modest gains from rising temperatures and losses from increased precipitation. The predictions from atmospheric ocean general circulation models suggest that livestock farmers in Kenya are likely to incur heavy losses from global warming. The highest and lowest losses are predicted from the Hadley Centre Coupled model (HADCM) and Parallel Climate Model (PCM) respectively, based on the Intergovernmental Panel on Climate Change A2 Special Report on Emissions Scenarios. The paper concludes that in the long term, climate change is likely to lead to increased poverty, vulnerability and loss of livelihoods. Several policy interventions are recommended to counter this impact.     

Unilateral climate policy and the green paradox: Extraction costs matter

I analyze the effect of unilateral climate policies in a two‐country model where fossil fuel extraction costs depend on both current extraction and remaining stock and where a constant marginal‐cost clean substitute is available. An intensification of climate policy in the country with an initially stricter policy does not increase early fossil fuel extraction (i.e., there is no “weak green paradox”) or the present value of pollution costs (i.e., there is no “strong green paradox”) if energy demand in that country is initially met with a mix of fossil fuel and a substitute. Whether a stricter climate policy in the country with an initially laxer policy causes a weak green paradox depends on the price elasticity of energy demand and the strength of the flow and stock dependence of extraction costs. If the reduction of total extraction is sufficiently strong, it overcompensates for a weak green paradox with respect to pollution costs. Thus, a weak green paradox does not necessarily imply a strong green paradox, due to stock dependence.     

On the spatial nature of the groundwater pumping externality

Most existing economic analyses of optimal groundwater management use single-cell aquifer models, which assume that an aquifer responds uniformly and instantly to groundwater pumping. In this paper, we develop an economic model of groundwater management that explicitly incorporates spatial dynamic groundwater flow equations. Calibration of our model to published economic studies of specific aquifers demonstrates that existing studies generally incorrectly estimate the magnitude of the groundwater pumping externality relative to spatially explicit models. In particular, for large aquifers with surface areas of thousands of square miles, the marginal pumping externality predicted by single-cell models may be orders of magnitude less than that predicted by a spatially explicit model, even at large distances from a pumping well. Conversely, for small aquifers with areas of a few hundred square miles or less, single-cell models reasonably approximate the pumping externality. Application of single-cell models to inappropriate settings may result in misleading policy implications due to understatement of the magnitude and spatial nature of the groundwater externality.     

Time consuming resource extraction in an overlapping generations economy with capital

For worldwide fisheries production, two major trends emerge for the next decades: a significantly larger role for aquaculture and reduced output due to climate change impacts. While the former leads to an increase in cost, the latter affects natural regeneration. To address both impacts, we investigate the relevance of resource extraction costs for a private property fishery in an intertemporal general equilibrium model with capital accumulation, commodity production and a labor market. We show how the extraction cost parameter—in addition to time preference, technology and natural regeneration—matters for the existence (and stability) of an economically feasible, nontrivial stationary state. Higher extraction costs increase the equilibrium resource stock, while a reduced regeneration rate (e.g. due to climate change) decreases the stock. Moreover, resource extraction overshoots its new equilibrium value after the cost shock while after a regeneration shock extraction levels adjust monotonically towards the new equilibrium.     

CAPITAL AGGREGATION IN THE PRESENCE OF OBSOLESCENCE-INDUCING TECHNICAL CHANGE

The major question addressed is the treatment of capital embodied technical progress. Should Obsolescence be deducted to calculate a net stock, or should quality adjustments be made in each vintage of new capital, or both, or neither? In order to estimate the contribution of new investment to growth it is necessary to use a capital stock where different vintages are weighted in proportion to their marginal products. The commonly used gross capital measures do not do this, because they do not allow for the higher marginal product of more modern capital. Such an allowance for capital embodied technical progress can be made either by quality adjusting new capital or by incorporating obsolescence into the valuation of the old capital (but not both). However, even if new capital incorporates an allowance for improved quality, it will still be necessary to revalue the old capital. Frequently, a reasonable approximation to the net capital stock results from a linear decline in quasi-rents and can be approximated by published estimates of the stock of capital net of straight line depreciation. Steady technical progress will not lead to the commonly used exponential service decline functions. To avoid overestimating the return to investment when technology changes it will be necessary to use information on capital embodied technical change to revalue old capital, rather than to change the price indices for new capital.     

Groundwater management under heterogeneous land tenure arrangements

We develop a groundwater extraction model that considers the Marshallian inefficiency associated with sharecropping and use data from Pakistan to simulate the impact of an open access regime and of optimal management on groundwater extractions, the state of the aquifer, and annual net benefits through time. We also evaluate a price instrument as a mechanism of inducing optimal extractions. Under both open access and optimal management, we observe notable differences in groundwater extractions and the water table level between the tenure model (which considers the behavior of both owner cultivators and sharecroppers) and the baseline model (which includes the behavior of only owner cultivators). We also find a modest difference in the aggregate net benefits generated by the two models. The results offer new insights—vis-à-vis land tenure heterogeneity—into the evaluation of more effective policies for groundwater management and aquifer sustainability.     

Optimal Extraction of a Polluting Nonrenewable Resource with R&D toward a Clean Backstop Technology

We study the optimal extraction of a polluting nonrenewable resource within the following framework: environmental regulation is imposed in the form of a ceiling on the stock of pollution and a clean unlimited backstop technology can be developed by research and development. More specifically, the time taken to develop a new technology depends on the amount spent on R&D. A surprising result is that the stringency of the ceiling and the size of the initial stock of the polluting nonrenewable resource have a bearing on whether environmental regulation speeds up the optimal arrival date of this new technology. Compared to a scenario with no environmental externalities, stringent environmental regulation drives up the optimal R&D investment and brings forward the optimal backstop arrival date only in the case of a large initial resource stock. Otherwise, if the initial resource stock is small, regulation reduces optimal R&D and postpones the optimal backstop arrival date. These results are explained by the two roles played by the backstop technology. First, the backstop serves to replace oil once it has been exhausted. As extraction is slowed down by regulation, the exhaustion of the nonrenewable resource is postponed and the long‐run gains of innovation are lowered. Second, environmental regulation raises the short‐run gains of innovation by increasing the cost of consuming just oil.     

The Welfare Effects of Environmental Taxation

Recent literature has investigated whether the welfare gains from environmental taxation are larger or smaller in a second-best setting than in a first-best setting. This question has mainly been addressed indirectly, by asking whether the second-best optimal environmental tax is higher or lower than the first-best Pigouvian rate. Even this indirect question has itself been approached indirectly, comparing the second-best optimal environmental tax to a proxy for its first-best value, marginal social damage (MSD). On closer examination, however, MSD becomes ambiguously defined and variable in a second-best setting making it an unreliable proxy for the Pigouvian rate. Given these observations, the current analysis reevaluates these welfare questions and finds that when compared directly to its first-best value, the second-best optimal environmental tax generally rises with increased revenue requirements. Even in cases where the second-best environmental tax is lower than its first-best value, the welfare gains may be greater than in a first-best setting. These results suggest that the marginal fiscal benefit (revenue recycling effect) exceeds the marginal fiscal cost (tax base effect) over a range of environmental tax rates that, for benchmark models, extends above the first-best Pigouvian rate. These findings reinforce the intuition that environmental policy complements rather than competes with the provision of other public goods.     

Renewable resource management with environmental prediction: the importance of structural specification

Environmental variability can substantially influence renewable resource growth, and as the ability to forecast environmental conditions improves, opportunities for adaptive management emerge. Using a stochastic stock‐recruitment model, Costello, et al. ( 2001 ) show the optimal management response to a prediction of favourable growth conditions is to reduce current harvests. We find this result may be reversed when environmental variability and stock are substitutes in growth, a possibility that has been ignored by resource economists. As an example, we analyze the South Carolina white shrimp fishery, finding the optimal response to a prediction of favourable overwinter conditions is to increase fall harvests.     

Optimal climate and fiscal policy in an OLG economy

This paper develops a climate–economy model to study the joint design of optimal climate and fiscal policies in economies with overlapping generations (OLGs). I demonstrate how capital taxation, if optimal, drives a wedge between the market costs of carbon (the net present value of marginal damages using the market interest rate) and the Pigouvian tax (the net present value of marginal damages using the consumption discount rate of successive OLGs). In contrast to deterministic infinitely lived representative agent models, at the optimum, the capital income tax is positive, the carbon price equals the market costs of carbon but it falls short of the Pigouvian tax when (i) preferences are not separable over consumption and leisure; and (ii) labor income taxes cannot be age-dependent. I also show that restrictions on climate change policy provide a novel rationale for positive capital income taxes.     

Price uncertainty,future markets and correlation

This paper examines the optimal trade and hedging decisions of a competitive exporting firm which faces concurrently hedgeable exchange rate risk and non‐hedgeable inflation risk. The macroeconomic interaction between exchange rate and domestic inflation rate risk is described by a state variable. The (strong) correlation is pivotal in determining the optimal risk management. It is shown how optimal hedging strategies are affected by state‐dependent preferences of the firm. The optimal hedge policy is to minimize the variation of marginal utility of final wealth across states of nature instead of minimizing the variance of final wealth.     

Groundwater management: The effect of water flows on welfare gains

We construct a spatially explicit groundwater model that has multiple cells and finite hydraulic conductivity to estimate the gains from groundwater management and the factors driving those gains. We calibrate an 246-cell model to the parameters and geography of Kern County, California, and find that the welfare gain from management for the entire aquifer is significantly higher in the multi-cell model (27%) than in the bathtub model (13%) and that individual farmer gains can vary from 7% to 39% depending of their location and relative size of demand for water. We also find that when all farmers in the aquifer simultaneously behave strategically the aggregate gains from management are significantly smaller. However, individual farmers do not have the incentive to behave strategically even with finite hydraulic conductivity when other farmers behave myopically.     

Does international oil volatility have directional predictability for stock returns? Evidence from BRICS countries based on cross-quantilogram analysis

While numerous studies have investigated the relationship between oil volatility and stock returns, it is surprising that little research has examined the quantile dependence and directional predictability from oil volatility to stock returns in BRICS (Brazil, Russia, India, China, and South Africa) countries. We address this issue by using the cross-quantilogram model proposed by Han et al. (2016). The empirical results show that, overall, oil volatility has a directional predictability for the stock returns in BRICS countries. When the oil volatility is in a low quantile (lower than its 0.1 quantiles), it is less likely to show either a large loss or a large gain in the stock market. In contrast, there is an increased likelihood of either large loss or a large gain in the stock market when the oil volatility is in a high quantile (higher than its 0.9 quantiles). The directional predictability from the oil volatility to stock returns depends on the net position of oil imports and exports of these BRICS countries in the oil market. The net oil exporters (Russia and Brazil) are less likely to have large gains and large losses in the stock market than are the net oil importers (India, China, and South Africa) when the oil volatility is in a low quantile. The net oil exporters are more likely to have large gains and large losses than are the net oil importers when the oil volatility is in a high quantile. The results are robust to change in the variable of oil volatility and the sample interval.     

How long to eat a cake of unknown size? Optimal time horizon under uncertainty

This paper is concerned with the determination of the optimal time horizon for the cake–eating problem under uncertainty. It is shown that if the uncertain exhaustible resource stock is a discrete random variable admitting at most a finite number of values, the optimal planning horizon is infinite (finite) according as the marginal utility of extraction–cum–consumption is infinite (a finite positive value) as the latter approaches zero, thereby extending the scope of the similar result under perfect certainty. Other results show that uncertainty will generally lengthen the planning horizon, implying a more conservative extraction policy under uncertainty, and that the extraction policy aimed at extracting an amount equal to the expected value of the uncertain resource stock takes longer than the expected value of the optimal planning horizon. JEL Classification: D81 and Q31 Combien de temps pour manger un gâteau de taille inconnue? L’horizon temporel optimal en régime d’incertitude. Ce mémoire s’attaque à la détermination de l’horizon temporel optimal dans le cas du problème du gâteau–à–manger en régime d’incertitude. On montre que si le stock incertain de la ressource épuisable est une variable aléatoire discontinue qui ne peut prendre qu’un nombre fini de valeurs, l’horizon temporel est infini (fini) selon que l’utilité marginale de l’extraction–cum–consommation est infinie (prend une value finie positive) quand celle–ci approche zéro, et ce faisant élargit la portée d’un résultat similaire obtenu en régime de certitude parfaite. D’autres résultats montrent que l’incertitude accroît généralement l’horizon temporel, ce qui suggère qu’une politique d’extraction plus conservatrice va prévaloir en régime d’incertitude, et que la politique d’extraction visant à extraire une quantitéégale à la valeur anticipée d’un stock de ressource incertain prend plus de temps que la valeur anticipée de l’horizon temporel optimal.     

Optimal Mechanisms for Heterogeneous Multi-Cell Aquifers

Standard economic models of groundwater management impose restrictive assumptions regarding perfect transmissivity (i.e., the aquifer behaves as a bathtub), no external effects of groundwater stocks, observability of individual extraction rates, and/or homogeneous agents. In this article, we derive regulatory mechanisms for inducing the socially optimal extraction path in Markov perfect equilibrium for aquifers in which these assumptions do not hold. In spite of the complexity of the underlying system, we identify an interesting case in which a simple linear mechanism achieves the social optimum. To illustrate potential problems that can arise by erroneously imposing simplifying assumptions, we conduct a simulation based on data from the Indian state of Andhra Pradesh.