Annual Review of Resource Economics - Volume 8, 2016

Regarding the current econometric scene, in this review I argue that (a) traditional econometric modeling approaches do not provide a reliable basis for making inferences about the causal effect of a supposed treatment of data in observational and quasi-experimental settings; and (b) the focus on conventional reductionist models and information recovery methods has led to irrelevant economic theories and questionable inferences and has failed in terms of prediction and the extraction of information relative to the nature of underlying economic behavior systems. Looking ahead, a nontraditional econometric approach is outlined. This method recognizes that our knowledge regarding the underlying behavioral system and observed data process is complex, partial, and incomplete. It then suggests a self-organized, agent-based, algorithmic-representation system that involves networks, machine learning, and an information theoretic basis for estimation, inference, model evaluation, and prediction.

In Professor George Judge's pursuit of information recovery and isolating causality in noisy effects observational data, there is a critical distinction between deductive and inductive empirical analysis. For the former, we bring together a synthesis of the literature that has emerged since Koopmans' measurement with theory philosophy. For the latter, we present a host of methodologies that attempt to isolate the causal mechanisms existing in patterns revealed in noisy measurement data. The deductive focus is limited by available theoretical constructs, whereas the inductive focus is fraught with data mining complications, ultimately finding its potential validation in forecasting.

This review focuses on four key scholars who were instrumental in helping to launch the field of natural resource economics: Siegfried von Ciriacy-Wantrup, James Crutchfield, John Krutilla, and Anthony Scott. Their contributions include recognizing natural resources as renewable capital, thereby altering the important dynamic dimensions of an efficient allocation. The introduction of irreversibility was a key element for decisions involving unique natural assets. Introducing uncertainty into these choices required consideration of appropriate public attitudes toward risk that led to the concept of a safe minimum standard. Identifying and emphasizing the salience of nonmarket values, particularly existence and bequest benefits, gave rise to the contingent valuation and the development of stated preference methods as a cottage industry. Setting forth and evaluating alternative management policies for open access resources in a dynamic context were other achievements. The backgrounds of these four scholars shaped their professional orientation; their contributions, in turn, have shaped the evolutionary path of resource economics research.

Identifying the effect of climate on societies is central to understanding historical economic development, designing modern policies that react to climatic events, and managing future global climate change. Here, I review, synthesize, and interpret recent advances in methods used to measure effects of climate on social and economic outcomes. Because weather variation plays a large role in recent progress, I formalize the relationship between climate and weather from an econometric perspective and discuss the use of these two factors as identifying variation, highlighting trade-offs between key assumptions in different research designs and deriving conditions when weather variation exactly identifies the effects of climate. I then describe recent advances, such as the parameterization of climate variables from a social perspective, use of nonlinear models with spatial and temporal displacement, characterization of uncertainty, measurement of adaptation, cross-study comparison, and use of empirical estimates to project the impact of future climate change. I conclude by discussing remaining methodological challenges.

Growing concerns over climate change and the potential for large damages due to nonlinear processes underscore the need for a meaningful sustainability assessment of an economy. Economists have developed rigorous approaches to conceptualizing sustainability based on the paradigm of weak sustainability, which relies on extensive substitution among reproducible capital, renewable resources, and exhaustible natural resources. In contrast, strong sustainability emphasizes physical limits to this substitution and the importance of maintaining the resilience of normally functioning biophysical processes. Recent progress in resource and environmental economics has demonstrated the feasibility of incorporating strong sustainability features, including tipping points, uncertainties, and resilience, to assess efficiency and optimal policies. Given that weak sustainability and intertemporal efficiency share a welfare theoretic foundation, we ask: To what extent can these approaches be applied to evaluate sustainability? We highlight recent work on assessing sustainability in imperfect economies and dynamic models of intertemporal welfare that embed strong sustainability features.

This article reviews and evaluates the nascent literature on the economics of climate engineering. The literature distinguishes between two broad types of climate engineering: solar radiation management and carbon dioxide removal. We review the science and engineering characteristics of these technologies and analyze the implications of those characteristics for economic policy design. We discuss optimal policy and carbon price, interregional and intergenerational equity issues, strategic interaction in the design of international environmental agreements, and the sources of risk and uncertainty surrounding these technologies. We conclude that climate engineering technologies, similar to mitigation and adaptation, should be a fundamental part of future domestic and global climate policy design. We propose several avenues in need of additional research.

This article provides a review and synthesis of geoeconomic models that are used to analyze coastal erosion management and shoreline change. We outline a generic framework for analyzing risk-mitigating and/or recreation-enhancing policy interventions within a dynamic framework, and we review literature that informs the nature and extent of net benefit flows associated with coastal management. Using stated preference analysis, we present new estimates on household preferences for shoreline erosion management, including costs associated with ecological impacts of management. Lastly, we offer some guidance on directions for future research.

Renewable Portfolio Standards (RPSs) are a key policy measure used by states in the United States to increase their production of renewable electricity. Economic theory shows that RPSs are not first-best policy measures for mitigating greenhouse gas emissions or solving other environmental problems. Nevertheless, they have been politically popular, in part because states hope they will help create new jobs in what the states expect will be a growth industry. Research suggests that RPSs are supported by Democratic legislatures in states with good solar and wind potential, are more likely in states with restructured electricity markets, and are less likely in states heavily dependent on natural gas for electricity generation. Research also suggests that RPSs have been successful at increasing renewable generation capacity, have increased the cost of electricity modestly where they have been implemented, and reduce carbon emissions at a cost roughly consistent with estimates of the social cost of carbon.

We review what is known about the economic efficiency of fuel taxes relative to efficiency standards aimed at mitigating environmental externalities from cars. We present a simplified model of car choice that allows us to emphasize the relationships between fuel economy, other car attributes, and miles traveled. We focus on greenhouse gas emissions, although we note how other environmental externalities affect our conclusions. Our main conclusion—that standards are substantially less efficient than a fuel tax—is already familiar. Less familiar are points we make about the relative importance of the rebound effect, on the effects of attribute-based policies, and the implications of behavioral biases. We point to areas where we believe future research can have the greatest contribution, including work on uncertainty, heterogeneity, and empirical studies in low- and middle-income countries.

Many countries have incentivized wind power projects to reduce their reliance on fossil fuels for generating electricity. As shown in this review, the benefits and costs of integrating electricity from an intermittent wind source into a preexisting electricity grid depend on the operating protocols of the electricity system, the preexisting generation mix, wind profiles, and the nature of economic incentives. Electricity systems are discussed from generation through transmission and distribution to retail demand, including how wind energy impacts investment in marginal (peak time) generating assets. The discussion also examines issues that could limit the usefulness of wind power at the high penetration rates now envisioned: the inability to store electricity, the need for fast-responding backup-generating capacity, network instability, low-capacity factors, and inappropriate incentives. Overall, this review finds that the costs of wind power likely exceed the benefits and that there may be limits to the proportion of electricity that can be generated by wind.

This review examines the provision of public goods and the prevention of negative externalities in forest management. It focuses on three issues: (a) biodiversity conservation and maintenance, (b) the role of forestry in carbon policies, and (c) internalizing negative water externalities. Public goods and negative externalities appear differently under different forest management regimes. A distinction is made between even-aged management, defined by the rotation framework, and uneven-aged management, defined by continuous cover models. Although the review focuses mostly on analytical models, it briefly considers recent numerical models relying on the detailed description of forest management. Both conventional instruments and new payments for ecosystem services are discussed.

Annually, nearly 500 gigatonnes of CO2 are exchanged between terrestrial ecosystems and the atmosphere, and this exchange is clearly affected by human activities related to the Earth's forests. Governments are therefore willing to draft legislation incentivizing forest activities that sequester carbon to combat climate change. In this review, we examine issues related to the creation of carbon offset credits through forest conservation, burning of wood biomass in lieu of fossil fuels, and intensive commercial management that accounts for all carbon fluxes, including postharvest. In doing so, we study the costs of monitoring, measuring, and contracting; the principal-agent problem; and questions related to life cycle analyses of CO2. We can only conclude that greater care is likely needed in the future to identify carbon offsets from forestry activities if these are to be traded in emissions markets.

The management of groundwater resources for use in agriculture is an issue that reaches far and wide; many of the world's most productive agricultural basins depend on groundwater and have experienced declines in water table levels. There is a socially optimal rate of extraction that can be modeled, measured, and achieved through policy and a complete definition of the property rights that govern groundwater. However, several factors may affect farmers' groundwater use decisions and behavior and may lead them to overextract groundwater. These factors include increases in irrigation efficiency, perverse incentives from policy, institutional incentives, and externalities.

Sustainable development requires that per capita welfare does not decline over time. The minimum condition is ensuring that any depletion of natural capital is compensated by reproducible and human capital, so that the value of the aggregate stock does not decrease. Meeting this condition is problematic if natural capital includes ecosystems, which not only provide unique goods and services but are also prone to irreversible conversion and abrupt collapse. Net domestic product accounting rules for the depreciation of the total stock of reproducible, human, and natural capital of an economy can be extended to incorporate the direct benefits provided by ecosystems. They also can integrate any capital revaluation that occurs through ecosystem restoration and conversion and the threat of irreversible collapse. These approaches confirm the economic interpretation of sustainability as nondeclining welfare. They can also be used to estimate the changes in the value of ecological capital due to economic activity.

The natural resource base, terrestrial and marine, provides rural households in lower-income countries with income, food, shelter, and medicines, which are variously gathered and hunted in common lands and waters. These resources may be actively managed, either by the government or local community; or they may be de facto open access, with little effort by governments to prevent what may be de jure illegal extraction. This review appraises the literature that encompasses the direct value of wild resources to rural households, the extent to which these resources mitigate poverty and inequality, and the importance of the institutional context. More recent literature increasingly addresses competing demands on the resource base, which both supports nearby livelihoods and enhances ecosystem services such as biodiversity; and the extent to which initiatives such as community-based payments for ecosystem services change how people interact with the resource base.

A sound understanding of poverty traps—defined as poverty that is self-reinforcing due to the poor's equilibrium behaviors—and their underlying mechanisms is fundamentally important to the development of policies and interventions targeted to assist the poor. We review the theoretical and empirical evidence on single equilibrium and multiple equilibria poverty traps at the macro-, meso-, and, especially, microlevels. In addition we review the literature exploring the various mechanisms that have been posited to perpetuate poverty. We find sufficient evidence to support the poverty traps hypothesis, suggesting that policies designed to interrupt those self-perpetuating mechanisms merit serious attention.

Recent food price fluctuations have sparked renewed interest in the impact of food prices on poverty and food security. This paper reviews the literature and analyzes why different authors often reach different conclusions regarding the welfare impacts of food price changes. We first show that systematic measurement errors in household surveys may seriously affect estimates of the poor's dependence on food purchases at any given point in time. We then turn to the theoretical case for why the rural poor might ultimately benefit from higher food prices, with a particular focus on agricultural supply responses and resultant increases in demand for unskilled farm labor, which raise the wages of the poor. Consistent with these predictions, more sophisticated simulation models and new econometric evidence suggest that sustained increases in food prices have often benefited the poor and likely contributed to faster global poverty reduction from the mid-2000s onward. Conversely, the recent decline in agricultural prices could retard global poverty reduction.

Contract farming (CF) has long been practiced but is becoming increasingly common in both developed and developing countries with the heightened interest of consumers in food safety and quality. Under CF, farmers and buyers make advance agreements on volume, quality, time of delivery, use of inputs, and price or pricing formula. This article critically reviews the literature on CF to assess how it contributes to improving production efficiency and income of farmers in general and of small-scale farmers in particular. Although our review focuses on literature in developing countries because of its predominance, we refer to literature in developed countries (primarily the United States) to gain a deeper understanding of the impacts of CF. We find that although CF contributes to the improvement of farmers' income by introducing new crops and production methods, there is room for strengthening its effects on poverty reduction through policy.

This review summarizes the theoretical and empirical literature on the importance of linkages between universities and industries in the development of commercial applications of biotechnology. These linkages range from formal agreements, such as patent licenses and research alliances, to informal collaborations, such as joint research, copublication, and consulting. Because biotechnology involves a new research method, the tacit knowledge embedded in it became critical to its commercialization. Specifically, it requires the direct involvement of star scientists who have this tacit knowledge and are well remunerated for it. This process is facilitated by the passage of the Bayh–Dole Act, which allows universities to retain ownership of crucial patents and provides incentives to the star scientists to cooperate in development and commercialization. Over time, a complex web of collaborations and alliances has evolved in therapeutic, diagnostic, and pharmaceutical biotechnology, whereas extensive consolidation has occurred in agricultural biotechnology.