Essays on Resource & Environmental Economics

Abstract

The purpose of this thesis is to gain a better understanding of how strategic interactions amongst agents shape outcomes in some areas of resource and environmental economics.

Chapter 1 of the thesis takes another look at the theory of `oil'igopoly that predicts that countries holding larger proven reserves of crude oil tend to produce quantities that are larger in absolute size but smaller as a proportion of their reserves. However, the literature on the subject thus far has only focussed on the interactions amongst the oil producers in determining the equilibria attained. The influence of interactions between the oil producers and the non-oil producers on the price-output path(s) has not been formalized in the context of the theory of `oil'igopoly. We reconsider the results of the theory of `oil'igopoly wherein the interactions between the oil and non-oil producers are explicitly modeled. We find that such a modeling approach not only allows us to capture the empirical regularity predicted by the theory of `oil'igopoly but is also able to generate a positive correlation between the price and quantity of oil traded, which is found in the data. Thus this modeling approach, which endogenizes the price of oil, forms a bridge between the theory of `oil'igopoly and the macroeconomy-oil price relationship literature pioneered by Hamilton (1983). We thus provide an alternative modeling approach that provides a deeper understanding of the drivers of the crude oil reserves-production relationship.

The theory of `oil'igopoly, however, abstracts away from the fact that crude oil is heterogeneous. In Chapter 2, we take into consideration the heterogeneity of crude oil and show how it affects the price-output relationship of crude oil production. We find that the preferences of oil-consuming nations influence the production decisions of the oil producers. In addition to matching the predictions of the theory of `oil'igopoly, we can show that oil-producing countries that have endowments of low grade crude tend to restrict their production compared with oil-producers that possess high grade crude. Considering the implications of the theory of `oil'igopoly in light of the heterogeneity of crude oil provides a deeper understanding of how energy policy in oil-consuming countries can affect the output decision of oil producers.

In Chapter 3 we consider the issue of catastrophic climate change. Fossil fuels when burnt for energy, release carbon dioxide into the atmosphere. Carbon dioxide, though not a pollutant in the classical sense, is the most important of the anthropogenic greenhouse gases. Despite strong and improving evidence of the role of excessive carbon dioxide emissions in hastening the arrival of climate-induced catastrophe, countries seem reluctant to reduce their dependence on fossil fuels. In this paper, we use the framework of a non-cooperative differential game to analyze why countries produce more carbon dioxide emissions than are deemed permissible given the current state of scientific understanding on the subject. We find that overemission of carbon dioxide, which results from the overconsumption of fossil fuels, is rational.