Resource extraction and uncertain tipping points

Arbeitspapier

A global planning problem is analyzed for extracting an exhaustible resource like oil when resource extraction - the only source for current consumption - also generates additions to the stock of GHGs that influence the likelihood of hitting a threshold representing climate change. We derive conditions for optimal extraction when we take into account joint emissions that accumulate to a stock that is governing the planner's beliefs of facing a climate change that will involve a loss in the production capacity of the global economy. Except for "annuity of the continuation payoff", which is the stationary rate of welfare after a climate change, the optimality conditions are very similar to the results found in Loury (1978) - where optimal extraction of a non-renewable resource of unknown size was analyzed. Not surprisingly we find that extraction has a cost ("environmental cost") beyond the standard opportunity cost ("resource rent"), implying a lower rate of extraction as long as no threshold has been hit, compared to the risk-free case. Such saving has an expected rate of return along an optimal strategy should be balanced against the standard required rate of return - the Keynes- Ramsey-Cass-Koopmans-condition.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Memorandum ; No. 03/2017

Classification and Topics

• Classification: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Exhaustible Resources and Economic Development ; Climate; Natural Disasters and Their Management; Global Warming
• Subject: resource extraction ; tipping point uncertainty ; climate change

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Vislie, Jon
• Event: Veröffentlichung
• (who): University of Oslo, Department of Economics
• (where): Oslo
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/165965
• Last update: 10.03.2025, 11:42 AM CET