Switching to a sustainable efficient extraction path

Bazhanov, Andrei (2007): Switching to a sustainable efficient extraction path.

Abstract

The economy depends on the essential nonrenewable resource and the path of extraction is nondecreasing and inefficient. At some point the government gradually switches to a sustainable (in sense of nondecreasing consumption over time) pattern of the resource use. Technical restrictions do not allow to switch to the efficient extraction instantly. Transition curves calibrated to the current pattern of world oil production are used as the extraction paths in the "intermediate" period. However, there is no solution in finite time for the "smooth" switching from the optimal "transition" to the optimal efficient path, constructed with respect to the same welfare criterion. We analyze numerically two approaches for the approximate solution: "epsilon-smooth" switching and "epsilon-optimal" transition curve with smooth switching. Both cases give the unexpected result: the consumption path along the "inefficient" transition curve is always superior to the constant which we obtain after switching to the "efficient" Hartwick's curve. The result implies that for the correct switching to the efficient curve in finite time the saving rule must be adjusted. We estimate the importance of following the efficient path by comparing the consumption along the plausible transition path and the efficient pattern of the resource use. For simplicity we use in our examples the constant per capita consumption as a welfare criterion and the Hartwick rule as the benchmark of investment rule.

• Item Type: MPRA Paper
• Institution: Queen's University, Far Eastern National University
• Language: English
• Keywords: Essential nonrenewable resource; Sustainable extraction; Hartwick rule; Transition to efficient path
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q38 - Government Policy; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q32 - Exhaustible Resources and Economic Development

References

Asheim, G.B., Buchholz, W., Hartwick, J.M., Mitra, T. and C. Withagen, 2007. Constant savings rates and quasi-arithmetic population growth under exhaustible resource constraints. Journal of Environmental Economics and Management, forthcoming.

Bazhanov, A.V., 2006 a. Decreasing of Oil Extraction: Consumption behavior along transition paths. MPRA Paper No. 469, posted October 16, 2006. Online at http://mpra.ub.uni-muenchen.de/469/01/MPRA\_paper\_469.pdf.

Bazhanov, A.V., 2006 b. Variation principles for modeling in resource economics. Vestnik DVO RAN, 6: 5-13. Online at http://mpra.ub.uni-muenchen.de/1309/01/MPRA\_paper\_1309.pdf.

Bazhanov, A.V., 2007 a. The peak of oil extraction and a modified maximin principle. Proceedings of the International Conference at Waseda University "Comparative Institution and Political Economy: Theoretical, Experimental, and Empirical Analysis", December 22-23, 2006; 99-128. Online at http://mpra.ub.uni-muenchen.de/2019/01/MPRA\_paper\_2019.pdf.

Bazhanov, A.V., 2007 b. The peak of oil extraction and consistency of the government's short- and long-run policies. MPRA Paper No. 2507, posted April 02, 2007. Online at http://mpra.ub.uni-muenchen.de/2507/01/MPRA\_paper\_2507.pdf

Brander J.A., 2007. Viewpoint: Sustainability: Malthus revisited? Canadian Journal of Economics. 40: 1-38.

Dasgupta, P. and G. Heal 1979. Economic Theory and Exhaustible Resources. Cambridge University Press, Cambridge, Eng., 501 pp.

Davis G.A. and R.D. Cairns 1999. Valuing petroleum reserves using current net price. Economic Inquiry. 37: 295-311.

Grimaud A. and L. Rouge 2005. Polluting non-renewable resources, innovation, and growth: welfare and environmental policy. Resource and Energy Economics. 27: 109-129.

Hartwick, J.M., 1977. Intergenerational equity and the investing of rents from exhaustible resources. Amer. Econ. Rev., 67: 972-974.

Karp L. and Livernois J. 1992. On efficiency-inducing taxation for a non-renewable resource monopolist. Journal of Public Economics, 49: 219-239.

Krautkraemer J.A., 1998. Nonrenewable Resource Scarcity. Journal of Economic Literature., 36: 2065 - 2107.

Nordhaus, W.D. and J. Tobin, 1972. Is economic growth obsolete? In: Economic Growth, 5th Anniversary Colloquium, V, National Bureau of Economic Research, New York; 1-80.

Pezzey J.C.V., 2002. Sustainability policy and environmental policy. Australian National University. Economics and Environment Network Working Paper EEN0211.

Solow, R.M., 1974. Intergenerational equity and exhaustible resources. Rev. Econ. Stud., 41: 29-45.