Natural Resources and Energy Security - Economics

Sommario

1.NR ALLOCATION AND ECON PERSPECTIVE..................................................................2

NR as input to production or growth........................................................................................... 2

Environmental security............................................................................................................... 2

H ...................................................................................................... 3

OW TO BEST ALLOCATE RESOURCES

Via markets................................................................................................................................. 3

Public sector intervention........................................................................................................... 3

Type of resource considered........................................................................................................ 4

A ........................................................................................................................... 4

LLOCATION MODELS

Non-renewable resources............................................................................................................ 4

Renewable resources.................................................................................................................. 4

2.NRS WEALTH: BLESSING OR COURSE..........................................................................5

Patterns....................................................................................................................................... 5

E .................................................................................................................................... 5

XPLANATIONS

Issue of the volatility of prices.................................................................................................... 7

Solutions..................................................................................................................................... 9

C ................................................................................................................................... 10

ONCLUSIONS

S - ...................................................................................................................... 10

ECURITY IMPLICATIONS

3.OPEC..................................................................................................................... 11

O ..................................................................................................................................... 12

IL MARKET

Two types of markets................................................................................................................ 12

E ........................................................................................................... 13

NERGY SECURITY IMPLICATIONS

Mission...................................................................................................................................... 13

Economic theory....................................................................................................................... 13

Oligopoly................................................................................................................................... 13

Cournot model or competition.................................................................................................. 13

................................................................................................................................................ 14

Monopoly.................................................................................................................................. 14

Cartel or collusion..................................................................................................................... 14

Agreement between independent firms to coordinate → Rather than have two separate

producers, we'd have one > monopoly..................................................................................... 14

................................................................................................................................................ 14

In monopoly, rather than in oligarchy, outputs are lower and prices higher.............................14

OPEC quotas............................................................................................................................. 15

Analysis under GT..................................................................................................................... 16

How to sustain collusion............................................................................................................ 16

4.ENERGY MARKETS AND CHALLENGES OF ENERGY DEPENDENCE................................16

M ................................................................................................................................. 16

AIN MARKETS

.................................................................................................................................................... 17

E ...................................................................................................................... 17

NERGY USE BY REGION

.................................................................................................................................................... 17

E (IEA)............................................................................................................. 17

NERGY USE BY SECTOR

5.NATURAL GAS......................................................................................................... 17

S ......................................................................................................................... 17

UPPLY AND DEMAND

M ......................................................................................................................................... 18

ARKETS

6.COAL..................................................................................................................... 18

7.ELECTRICITY........................................................................................................... 19

S ....................................................................................................................... 19

OURCES TO PRODUCE

............................................................................................................................... 19

NUCLEAR.................................................................................................................. 19

T .......................................................................................................................................... 19

HE USE

C .............................................................................................................. 20

HALLENGES AND SOLUTIONS

COSTS OF ENERGY..................................................................................................... 20

8.ENERGY MARKETS: STRUCTURES AND PRICE STRATEGIES.........................................20

1 W ........................................................................................................ 21

HOLESALE AND RETAIL MARKETS

N . ................................................................................................21

ATURAL MONOPOLIES VS COMPETITION

F . ................................................................................................................. 21

UTURE VS SPOT MARKETS

E ' ............................................................................................................ 21

NERGY S PRICES FLUCTUATION

E ........................................................................................................................ 22

NERGY DEPENDENCE

REPower EU............................................................................................................................... 22

Reducing EU dependence on Russia.........................................................................................22

F .......................................................................................................................... 22

URTHER MEASURES

9.CLIMATE CHANGE AS AN EXTERNALITY....................................................................22

............................................................................................................................... 22

C .............................................................................................................................. 22

LIMATE CHANGE

Effects of Global Warming on climate........................................................................................23

W ........................................................................................................................ 23

HY IS IT A PROBLEM

Economic impacts..................................................................................................................... 24

R ..................................................................................................................... 25

EACT TO THE PROBLEM

Decarbonisation........................................................................................................................ 25

Paris Agreement........................................................................................................................ 25

C .................................................................................................... 26

LIMATE CHANGE AS AN EXTERNALITY

Optimal level of pollution.......................................................................................................... 27

.................................................................................................................................................... 27

Fixing externalities (in general)................................................................................................. 27

Price-base mechanism or Pigouvian Tax....................................................................................27

Quantity-based mechanism: quotas..........................................................................................28

Price vs. quantity measures...................................................................................................... 30

C .............................................................................................................................. 30

LIMATE FINANCE

10.SUSTAINABILITY AND OTHER CHALLENGES RELATED TO THE ENERGY SECTOR..........30

Sustainable development.......................................................................................................... 31

Negative externalities of the energy sector..............................................................................31

Approaches to the issues.......................................................................................................... 31

1. NR allocation and econ perspective

NR as input to production or growth

( )

Q=f K , L

A classical economy's approach

Smith → NR as an important determination of national wealth, but there are limits

 to its growth

Malthus → Land availability is fixed and diminishing returns in agriculture +

 population growth = output per capita is deemed to fall

Ricardo → land is fixed but of varying quality > agriculture output can be expanded

 by increasing the intensive margins (exploiting land more intensively) or exploiting

extensive margins (turning uncultivated into cultivated land)

Still limits were set by diminishing marginal returns

o

Mill → first to introduce modern view of NR, broader than an input to production



Environmental security

NS as a broader concept comprising special goods and services

Comprised of four kinds of services

1. Provisioning

a. Food and water production and security, energy secruty

2. Supporting

a. Nutrient cycling

b. Soil formation

c. Primary production

2 d. Habitat provision

3. Regulating, security against natural disasteers

a. Climate and flood regulation

b. Water purification

4. Cultural

a. Piritual and aesthetic

b. Educational

c. Recreational

How to best allocate resources

Economics generally relies on markets to determine how to best allocate goods

Via markets

Neoclassical economics:

markets determine the best allocation possible by allowing supply=production and

 demand=consumption to freely interact, driven by price formation

The equilibrium is achieved through the rules of equimarginality where

 Utility maximization is MU=P

o Profit-maximization MR=MC

o

↓

Welfare economics (drawing on Adam Smith’s concept of the invisible hand):

Under a set of conditions (perfect competition, presence of private goods etc.)

 markets can achieve allocative efficiency or Pareto optimality

it is not possible to re-allocate resources in any better way, such that at least one

 agent (consumer or producer) is better off without anyone else being worse off (i.e.

best possible allocation)

consumers are maximizing their utility, producers are maximizing their profits, no

 one would want to move away from the identified equilibrium (social welfare is

maximized)

Because of their nature, NR are not best allocated via markets because they do not satisfy

the conditions required to achieve efficiency though them

NRs are not typically private, but public goods (oil/gas vs. forests)

 Non-rivalry and non-excludability (or some degree thereof, at least)

o Access and use of NRs is often «free», which induces over-exploitation

o

Even when NRs are private goods, they are not typically traded in perfectly

 competitive markets

NR endowment tends to be concentrated in few countries (competitive

o advantage) providing incentives for collusion

Relative scarce supply of resources tends to encourage «rent-seeking»

o behaviour (scarcity rents)

Public sector intervention

It is often required as it drives private initiatives towards the right decision

There are several instruments available (regulations, taxes/subsidies, standards/quotas),

but also several problems related to designing the optimal policy:

Lack of/limited information regarding what is the is socially desirable level of NR use

 Require knowledge of the benefits and costs of preservation



3 There are methods to infer information about how much people value the

 environment

Type of resource considered

NR allocation model depends on type of resource considered

Renewable (eg. timber, wildlife, water, air etc.)

 Capable of re-generation unless used beyond certain critical thresholds

o

Non-renewable (eg. fossil fuels, uranium, gold, coal, peat etc.)

 Exist in either fixed amounts or are renewable only on a long geological

o timescale

What should be the optimal extraction/use over time such that resources are available for

as long as possible?

Allocation models

Non-renewable resources

ISSUE

How much of a non-renewable resource (e.g. mineral, oil, etc.) should be used for present

consumption and how much should be left for future use (given that it will be exhausted at

some point)?

Elements to consider:

Stock availability (reserves): St being the stock at time t and S0 being the stock at

 moment of discover

Rate of Extraction: Rt

 Reserve-to-use-ratio (number of years necessary to deplete the reserve): γ= St /

 Rt

Other elements to consider:

Marginal benefits from the use of non-renewable resources (Demand)

 Marginal costs of extraction

 Market price



Resulting market equilibrium will determine what is optimal BUT trade-off between what is

optimal for present and future generations.

↓

From the perspective of the market, the present generation would be extracting too much,

leaving too little for future generations.

From the perspective of the future generations, the present generation should extract less

of the resource, in order to leave more for the future.

To extract the socially desirable (efficient) quantity, present generations can be

encouraged to extract less (and save more for later) by making the extraction of the NRs

more costly (or less profitable).

Renewable resources

How much of a renewable resource (e.g. timber/biomass, water for energy production etc.)

should be used, given that it will regenerate