Showing papers by "Rick van der Ploeg published in 2014"

International Capital Markets, Oil Producers and the Green Paradox

Abstract: A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given.

The Elephant in the Ground: Managing Oil and Sovereign Wealth

Abstract: Oil exporters typically do not consider below-ground assets when allocating their sovereign wealth fund portfolios, and ignore above-ground assets when extracting oil. We present a unified framework for considering both. Subsoil oil should alter a fund's portfolio through additional leverage and hedging. First-best spending should be a share of total wealth, and any unhedged volatility must be managed by precautionary savings. If oil prices are pro-cyclical, oil should be extracted faster than the Hotelling rule to generate a risk premium on oil wealth. We then discuss how the management of Norway's fund can practically be improved with our analysis.

Climate Policy and Nonrenewable Resources: The Green Paradox and Beyond

Abstract: A detailed and rigorous analysis of the effect of climate policies on climate change that questions the empirical and theoretical support for the "green paradox." Recent developments suggest that well-intended climate policies-including carbon taxes and subsidies for renewable energy-might not accomplish what policy makers intend. Hans-Werner Sinn has described a "green paradox," arguing that these policies could hasten global warming by encouraging owners of fossil fuel reserves to increase their extraction rates for fear that their reserves will become worthless. In this volume, economists investigate the empirical and theoretical support for the green paradox. Offering detailed and rigorous analyses of the forces and assumptions driving Sinn's argument, the contributors consider whether rising carbon tax rates inevitably speed up climate change; the effects of the design of resource markets, the availability of clean substitutes, and the development of new technologies; and the empirical evidence (or lack thereof) for the green paradox result. They consider extraction costs; sustainability and innovation; timing, announcement effects, and time consistency in relation to policy measures; and empirical results for the green paradox phenomena under several alternative policy measures. Contributors Julien Daubanes, Corrado Di Maria, Carolyn Fischer, Florian Habermacher, Michael Hoel, Darko Jus, Gebhard Kirchgassner, Ian Lange, Pierre Lasserre, Volker Meier, Karen Pittel, Stephen Salant, Frank Stahler, Gerard van der Meijden, Frederick van der Ploeg, Edwin van der Werf, Ngo Van Long, Ralph A. Winter, Cees Withagen

Intergenerational Inequality Aversion, Growth and the Role of Damages: OCCAMs Rule for the Global Carbon Tax

Abstract: We use the Euler equation to put forward a back-on-the-envelope rule for the global carbon tax based on a two-box carbon cycle with temperature lag, and a constant elasticity of marginal damages with respect to GDP. This tax falls with time impatience and intergenerational inequality aversion and rises with population growth and prudence. It also falls with growth in living standards if inequality aversion is large enough or marginal damages do not react much to GDP. It rises in proportion with GDP if marginal climate damages are proportional to output and has a flat time profile if they are additive. The rule also allows for mean reversion in climate damages. The rule closely approximates the true optimum for our IAM of Ramsey growth, scarce fossil fuel, energy transitions and stranded assets despite it using the more complicated DICE carbon cycle and temperature modules. The simple rule gets close to the social optimum even if damages are much more convex than in DICE.