abstracts

Resource management under catastrophic threats: an overview

Author : Yacov Tsur and Amos Zemel, The Hebrew University of Jerusalem and Ben-Gurion University of the Negev

The literature on the economics of catastrophic environmental events tends to emphasize their common features: These events are abrupt occurrences at some unknown future date(s) that entail significant adverse consequences. Here, we focus attention on the differences between various types of such catastrophic occurrences and on the implications of these differences for the optimal responses to the variety of hovering risks. It turns out that seemingly small differences in the specifications of the occurrence conditions and the expected damage may give rise to diametrical effects on the optimal long term policies designed to address them. Recent developments in the study of catastrophic occurrences include simultaneous threats of several distinct events, mixed uncertainty and delayed observation of the event occurrence.

Harnessing and Managing Natural Resource Windfalls

Author : Rick van der Ploeg, University of Oxford

Many countries that discover oil or gas experience a worsening of competitiveness, a decline in the traded sector and reduced growth prospects even before the oil or gas is being pumped out of the ground. The optimal response is to borrow and have a current account deficit ahead of the windfall, to save during the windfall, and to hand out a citizen dividend after the windfall. Any accumulated funds should be invested abroad, not in the domestic economy. However, if the country experiences capital scarcity and financial frictions, part of the oil and gas revenue should be invested in the domestic economy and to speed up growth and development. Furthermore, the remaining parts of the oil and revenue should be used to boost consumption but primarily to finance a pro-business policy to stimulate capital accumulation, and further down the development path switch to a pro-labour policy. This can be illustrated with a macro growth model with financial frictions, workers and a class of capitalists with different degrees of productivity and wealth. We conclude with various political economy reasons for why such first-best policies to harness oil and gas revenue often fail, paying attention to politically motivated tariffs, partisan biases associated with the political risk of being removed from office and the risk of stranded assets due to stepping up of climate policy or renewable energy breakthroughs. Some of the latter are best analysed as catastrophic threats of regime shifts.

The value of biodiversity as an insurance device

Author : Katheline Schubert, Paris School of Economics

This paper presents a benchmark stochastic endogenous growth model of an agricultural economy with Epstein-Zin preferences. Producing food requires land, and increasing the share of total land devoted to farming mechanically reduces the share of land devoted to biodiversity conservation. However, safeguarding a greater number of species guarantees, through spatial exchanges, better ecosystem services, which in turn ensure lower volatility of agricultural productivity.

We explicitly characterize the optimal conversion/conservation rule, as well as the total

value of biodiversity in terms of the welfare gain from biodiversity conservation, and the marginal value of biodiversity in terms of risk premium reduction, namely its insurance value.

We then study the strategic competition among farmers for land use. Each agent can take possession of a part of the collective forest land and convert it to farming. We characterize the land converted by each farmer and her welfare at the Nash equilibrium. We evaluate the over-exploitation of the land and the agents' welfare loss compared to the socially optimal solution and we study the drivers of the inefficiencies of the decentralized equilibrium.

Misfortunes never come singly: Environmental risks, policy uncertainty, and economic growth

Author : Lucas Bretschger (joint with Alexandra Brausmann), ETH Zürich

In many ecological and economic systems an occurrence of a catastrophic event triggers further natural or man-made shocks. Environmental disasters may, for example, prompt a rise in population activism or sudden government-imposed policies which are not expected by market participants, or they may trigger epidemics and loss of life. Extinction of one type of species may cause a chain reaction in which multiple species may end up eradicated. We study the effects of such interdependent shocks on the environment, the economic growth rate, and the optimal spending on disaster prevention having in mind primarily environmental shocks caused by emissions of greenhouse gases. The damage from an initial disaster propagates to the frequency of future shocks with potentially large costs to the economy. We provide closed-form solutions for various scenarios and find that the linkages between the shocks raise the optimal abatement propensity while increasing the optimal savings and decreasing economic growth. We relate our findings to current environmental problems and discuss possible improvements of political decision-making.

Exogenous vs endogenous risk in the management of catastrophes

Author : Eric Naevdal, Frisch Centre, Norway

Man’s increased impact on the environment has increased the attention paid by resource economists to catastrophic risk. Many new insights have been gained and a number of real world problems have been illuminated. However some work remains in understanding how the curvature of hazard functions and the specification of catastrophic impacts affect management. The present work aims to take a few baby steps towards improving our understanding. In particular it is shown that exogenous and endogenous risk implies that management concentrates on completely different aspects of a catastrophic risk problem.

Tipping points, delays, and the control of catastrophes

Author : Matti Liski, Aalto University, Finland

This paper develops a novel approach for making inferences about catastrophes that may be under way, though no one knows. A decision-maker chooses a flow variable (e.g., consumption) contributing to a stock (e.g., greenhouse gases) that triggers an experiment at each new untried level. We show the optimality of non-monotonic policies, with rapid experiments followed by more cautious, wait-and-see phases. The policies also depend on how the current state was reached; they depend on the history of past experiments. Starting with a history of rapid past increase in the stock leads to cautiousness and to less experimentation in total.

Carbon Capture and Storage with Enhanced Recovery

Author : Cees Withagen, VU University Amsterdam

The use of carbon capture and storage (CCS) is an appealing option to meet the ambitious objectives of Paris Agreement. Captured Co2 emissions can also be injected in active oil fields to perform anhanced oil recovery (EOR). We study a dynamic model of CCS and EOR of an economy subject to a cap on the admissible atmospheric Co2 concentration. CCS can occur in inert reservoirs or in oil field implementing EOR. We show that if the economy implements EOR it must do so immediately at the beginning of the planning period and does not stop doing it before being constrained by the carbon cap.

Carbon sequestration in the land Biosphere: local research global implications

Author : Dan Yakir, 2019 Israel Prize winner, Weizmann Institute of Science

Current climate change is associated with the increase in atmospheric greenhouse gases concentrations, primarily CO2. The rate of increase in atmospheric CO2 concentrations is strongly influenced by the Land Biosphere. At present, the Land Biosphere re-absorbs nearly 30% of our global fossil fuel derived CO2 emissions. Large scale deforestation, fires, and tree mortality can significantly reduce this capacity and speed-up climate change. In contrast, there are suggestions that the land carbon sink can be increased by forest restoration, afforestation, and enhancing carbon storage in soils. The Biosphere—Climate interactions are further complicated because land cover and land use changes can also directly influence climate, irrespective of carbon sequestration. This can be due to its effects on surface albedo, on atmospheric moisture, or on surface roughness and, in turn, on atmospheric turbulence. Research in our semi-arid region provides opportunities to enhance our knowledge in this context. First, in the form of “space for time” research, examining vegetation response to climate expected in the future in currently more temperate regions. And second, because some processes, subdued under mild conditions, emerge or enhanced under harsher climate, permitting examination and quantification.

Global warming and the associated tendency to extreme weather

Author : Pinhas Alpert, Tel Aviv University

The eastern Mediterranean (EM) is expected to be influenced by climate changes that will significantly affect ecosystems, human health and socio-economic aspects. One aspect in this vulnerable area is the length of the seasons especially that of the rainy winter season against the warm and dry summer. The synoptic seasons' definition of Alpert et al. (2004) was applied to an ensemble of eight CMIP5 models, under RCP8.5 and RCP4.5 scenarios, to predict the changes in the lengths of EM seasons during the 21st century. It is shown that the ensemble adequately represents the annual cycle of the main synoptic systems over the EM. Global and regional multi-model evaluation indicates strong warming and drying of the Mediterranean region (Hochman et al.,2018). Precipitation predictions: Japanese and RCM models both show increased interannual variability and probability for increases of multi-year droughts. Additional information from ensemble of climate models is shown to improve our ability to answer questions such as “what is the probability that there will be a multi-year drought or severe heat wave in the coming decades?” and help inform our policy and adaptive response. I will highlight the benefit of using APHRODITE rain data over the Mid-East for evaluation of CMIP5 ensembles with focus on extreme indicators (Hochman et al. 2017, 2018, Samuels et al., 2017).Different ensemble approaches are employed to project changes in some significant climate rain indicators for the 21st century. I will present new method tested over the E. Mediterranean that demonstrates the usefulness of a predictability index for extreme weather (Hochman et al., 2019).

Valuing meteorological services in resource-poor settings

Author : Alexandra Brausmann, ETH Zürich

Changing climate and weather patterns have resulted in reduced agricultural productivity in some parts of the world and put pressure on global food security. Availability and improved quality of meteorological information is seen as a potentially propitious means of adaptation to changing climate conditions. Forecasts of extreme weather events are especially valuable in resource-poor settings where climate-related vulnerability is high, such as for smallholder farmers in the developing world. In this paper we provide estimates of frost warnings valuation in the context of small-scale quinoa production in the Peruvian Altiplano. We first present a detailed contextual assessment of quinoa production in the study region based on agrometeorological and socio-economic data that was obtained through a representative farm household survey conducted in December 2016. Building on this assessment, we propose a stochastic life-cycle model, replicating the lifetime cycle of a quinoa-producing household, in order to derive a theoretical valuation of frost warnings. Calibrating the model to our data we provide estimates of frost-warning valuation which are in the range of $30-50 per household and year, depending on the forecast accuracy and agents' risk aversion. In a last step, using the observational data from the farm household survey, we show that access to existing meteorological services is empirically associated with avoided losses in agricultural production that amount to $18 per average household and per year. Our findings point to high climate vulnerabilities of smallholders in the Peruvian Altiplano and potentially large welfare gains from incorporating improved meteorological services into their decision-making process.