Annual Review of Resource Economics - Volume 7, 2015

A transcript of an interview of Douglass C. North by Gardner Brown, with an introduction by Dean Lueck.

In this article, we first review the history of carbon dioxide (CO2) emissions from the combustion of fossil fuels for the People’s Republic of China (China). As Chinese regulators have announced efforts to directly regulate CO2 emissions, we review the history of institutions charged with climate regulation in China. Next we review China’s existing market-based approaches to emission control in the form of the world’s largest effluent fee system for air and water pollutants as well as seven pilot carbon markets. We conclude with a discussion of the issues and challenges ahead in adopting market-based instruments to regulate CO2 emissions in China.

The concept of environmental migrants occurs frequently in the policy debate, in particular with regard to climate change and the incidence of such migration in low-income countries. This article reviews the economic studies of environmentally induced migration. It includes recent empirical analyses that try to link environmental change to migration flows and the spatial distribution of population. A consensus seems to emerge that there is little likelihood of large increases in international migration flows due to climate variability. The evidence to date shows that regional migration will be affected, however, either on the African continent or internally, within country borders. Theoretically, environmentally induced migration can be analyzed using different frameworks: the classical Harris-Todaro model of rural-urban migration, new economic geography models, models grounded in environmental economics of pollution externalities with free factor mobility, and the new economics of labor migration. I review some of the latest attempts to analyze environmentally induced migration theoretically and the policy-relevant conclusions that can be drawn.

We review the literature on bankable emissions permits that has developed over the last two decades. Most articles analyze either theoretical or simulation models. The theoretical literature considers the problem of minimizing the discounted sum of social costs and the possibility of decentralizing the solution through competitive permit markets. In some cases, authors do not explicitly consider pollution damages but instead assume that the planner’s goal is to minimize the discounted social cost of reducing cumulative emissions by a given amount. In other cases, authors do not explicitly consider an emissions reduction target but assume that the goal is to minimize the discounted sum of pollution damages and abatement costs. Simulations permit evaluation of alternative government policies under uncertainty. We conclude by pointing out directions for future work.

Traditional energy technologies and consumer products contribute to household well-being in diverse ways but also often harm household air quality. We review the problem of household air pollution at a global scale, focusing particularly on the harmful effects of traditional cooking and heating. Drawing on the theory of household production, we illustrate the ambiguous relationship between household well-being and adoption of behaviors and technologies that reduce air pollution. We then review how the theory relates to the seemingly contradictory findings emerging from the literature on developing country household demand for clean fuels and stoves. In conclusion, we describe an economics research agenda to close the knowledge gaps so that policies and programs can be designed and evaluated to solve the global household air pollution problem.

International trade in hazardous and nonhazardous waste and scrap products has been growing at an exceptional rate the past two decades. This review presents current data on the magnitude and trends regarding this growth and discusses the recent literature as it pertains to the economic incentives and drivers of international waste trade. Differences in environmental policy, taxes, disposal fees, and transport costs are important determinants across countries. However, the illegal nature of many types of hazardous waste also means that organized crime may play a role in some countries. Gaps in our understanding regarding microeconomic incentives as they relate to upstream and downstream recyclers and to the social welfare implications for wages, environmental quality, and human health are also discussed.

Climate change has in recent years moved to the forefront of the policy scene. At the same time, the research literature on macroeconomic aspects of climate change has grown and broadened significantly. In this review, we survey and discuss this literature, with special attention given to results that help shed light on important qualitative questions regarding how an optimal carbon tax should be set. The review covers topics such as spatial aspects of optimal taxes, interactions with other taxes, uncertainty, technological change, and the qualitative time profile of the optimal tax.

The regulation of environmental externalities at the global level requires international agreements between sovereign states. Game theory provides an appropriate theoretical tool for analysis. However, game theory can result in a wide range of outcomes, and therefore it is important to discuss the assumptions and mechanisms of the different approaches and to relate these with what is observed in practice. The basic picture is not optimistic: If there are large gains of cooperation, the stable coalition is small. This grim picture challenges the perspective and design of international agreements. This article discusses and compares the different approaches: noncooperative, cooperative, dynamic, and evolutionary. Asymmetries and the options for side payments are considered. At the end, some more optimistic ways forward are presented.

The often observed empirical divergence between WTA and WTP measures of welfare change continues to be a topic of interest to both theoretical and applied economists. The divergence has particularly important implications for environmental policy. In this article, we review behavioral and other explanations of the disparity, with a focus on their connections to neoclassical welfare theory, and evaluate the empirical evidence of these explanations through the same lens. Some explanations of the disparity are consistent with neoclassical models, and some are not. Likewise, some imply that the divergences are attributed to underlying preferences (neoclassical or not), whereas others suggest that the divergences are due to elicitation methods, cognitive limitations, or other non-preference-related reasons. We argue that the source of the divergence can inform the choice of which measure, WTP or WTA, to use in a given empirical application.

We synthesize literature on the spatial aspects of coupled natural-human systems across a variety of natural resource contexts and introduce a framework that can be used to compare modeling approaches and findings across applications. The important components of these systems include spatial heterogeneity in benefits and costs and connectivity of the network. One or more of these components is necessary for spatial policies to be the efficient solution. We highlight the importance of these components by identifying their role in previous work that shows that spatial differentiation in policy implementation is optimal. We pay particular attention to research highlighting the difference between spatial and aspatial policies and the presence of optimal boundary solutions. Finally, we develop a stylized metapopulation model to relate findings in the spatial bioeconomic literature to the theory of second best in public economics and suggest areas for future analysis.

This article presents an overview of the economics and management of a population. It reviews the biology of survival and reproduction and various feedback effects that exist between the population and the environment. This discussion leads to an assessment of the potential complexities characterizing population dynamics. The review evaluates the options available in population management, with a focus on the choice of decision rules used by managers and policy makers. The analysis investigates several important concepts in bioeconomics, including dynamics, viability, sustainability, efficiency, and resilience.

Land-use change is a leading cause of environmental degradation in terrestrial systems and has important implications for natural resource use. Economists have a long tradition of studying land use and in recent decades have developed empirical land-use models using econometric and optimization approaches. Integration of these land-use and biophysical models allows for a more comprehensive analysis of the consequences of future land-use change and the use of land-use policies to avoid undesirable outcomes. I provide a conceptual framework for the modeling approach, describing the individual components of an analysis as well as how they are linked together. My review describes how the literature has evolved to take advantage of spatial data and greater computing capabilities. Although most researchers have used either an econometric or an optimization approach, there is potential to combine these methods to identify more efficient land-use policies that still meet criteria of tractability and political acceptance.

Whether it is fair to characterize natural resource wealth as a curse is still debated. Most of the evidence derives from cross-country analyses, providing cases both for and against a potential resource curse. Scholars are increasingly turning to within-country evidence to deepen our understanding of the potential drivers, and outcomes, of resource wealth effects. Moving away from cross-country studies offers new perspectives on the resource curse debate and can help overcome concerns regarding endogeneity. Therefore, scholars are leveraging datasets that provide greater disaggregation of economic responses and exogenous identification of impacts. This article surveys the literature on these studies of local and regional effects of natural resource extraction. We discuss data availability and quality, recent advances in methodological tools, and the main findings of several research areas. These areas include the direct impact of natural resource production on local labor markets and welfare, the effects of government spending channels resulting from mining revenue, and regional spillovers. Finally, we take stock of the state of the literature and provide suggestions for future research.

In the past decade, innovations in hydraulic fracturing and horizontal drilling have fueled a boom in the production of natural gas (as well as oil) from geological formations—primarily deep shales—in which hydrocarbon production was previously unprofitable. Impacts on US fossil fuel production and the US economy more broadly have been transformative, even in the first decade. The boom has been accompanied by concerns about negative externalities, including impacts to air, water, and quality of life in producing regions. We describe the economic benefits of the shale gas boom, including direct market impacts and positive externalities, providing back-of-the-envelope estimates of their magnitude. This article also summarizes the current science and economics literatures on negative externalities. We conclude that the likely scope of economic benefits is extraordinarily large and that continued research on the magnitude of negative externalities is necessary to inform risk-mitigating policies.

We provide an introductory review to the application of the theory of incentives under asymmetry of information to the exploitation and management of natural resources. We concentrate mostly on principal-agent problems with adverse selection as posed by the regulation of nonrenewable resources, stressing the fact that the inherently dynamic nature of natural resource exploitation creates situations and results not found in other contexts. We also point out private information issues that may arise involving renewable as opposed to nonrenewable resources, strategic interactions with signaling between decision makers in resource exploitation games, and the design of environmental policy in which principal-agent problems subject to moral hazard may occur.

The Industrial Food and Agricultural (IFA) industry has become increasingly excoriated by proponents of the Naturalization Food and Agricultural (NFA) paradigm over the past decade. Thought leaders of this alternative movement have been calling for economic and policy overhauls of the food system—touching upon human health, labor rights, the environment, climate change, and animal welfare. Although the majority of these thought leaders are not economists or scientists, their arguments are structured to shape consumer choices and farmers’ production decisions, influence food and agricultural policy, and ultimately affect the economics of the industry. In this article, we survey publications at the forefront of the NFA paradigm, touching upon the work of Pollan, Schlosser, Petrini, Bittman, Nestle, and Kremen, among others, as well as the earlier contributions of Carson, Sinclair, Steinbeck, Buck, and even Jefferson. Their solutions, although short on quantitative analysis and long on prescriptions, address the real concerns of the general public and lay the foundation for economists to advance public discourse through analytical research on the NFA paradigm.

Interest in agricultural supply response increased dramatically after model predictions of land use change were used to estimate biofuel greenhouse gas emissions. The models divide crop response into higher yield—the intensive margin—or more land—the extensive margin. Input adjustments are assumed to drive yield response. But most yield changes result from adoption of technology. Regulators and modelers assume that increased harvested area implies conversion of land from forest or pasture to crops. With the notable exception of African countries, recent expansion of harvested area is due to more intensive use of existing agricultural land through multiple cropping and technology improvement. A lack of response at the extensive margin is consistent with inelastic estimates of land use change estimated by using time-series data. Option value is one reason for this inelastic response. Predictions of land use change based on cross-section data imply much higher land use elasticities than are consistent with recent data.

Rapidly rising incomes are driving demand for animal protein and livestock globally. The move toward more intensive production systems to support this increased demand is projected to increase the dependence on antibiotic growth promoters. The volume of antibiotics used for growth promotion in livestock outstrips that used for disease treatment in humans and creates significant selection pressure for the evolution of antibiotic resistance—a challenge for global health and resource conservation. This review describes the benefits and costs of antibiotic growth promoters in livestock and considers the prospects for more fully accounting for the externality costs.

Closing the loopholes of downstream application of the Capper-Volstead exemption in the food system and pay for delay in pharmaceuticals is an important advance in US and EU antitrust norms. First, pay-for-delay conduct has been harmful for pharmaceuticals customers. After ten years of litigation that divided circuit courts, the Supreme Court decreed that payments to generic drug sellers by the patent holders of the brand equivalent that are aimed at delaying entry are illegal, but did so under a structured rule-of-reason approach. EU competition authorities treat such payments as per se civil infractions. Second, until court decisions made in 2011–2014, the reach of the Capper-Volstead Act and the legality of pay-for-delay conduct in the drug industry were in doubt. In 2015, most federal circuits now clearly agree that, at a minimum, acreage restrictions by marketing cooperatives are per se illegal. Moreover, any manipulation by farmers’ cooperatives of upstream supply is also likely to be illegal.