Unlike most other models of resource extraction and

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Unformatted text preview: 466 CATEGORY 10: ENERGY AND CLIMATE ECONOMICS, papers.ssrn.com/sol3/papers.cfm? abstract_id=1855899] E. Liu Although climate change is a global problem, international negotiations have failed to deliver a global approach to emission reductions. Underlying this problem is the classic market failure of emission reductions being a global public good : when some country decides to introduce emission reduction policies to correct the externality stemming from GHG emissions, all other countries benefit from slower global warming, and they cannot be excluded from doing so. This observation has led to the concern that unilateral emission reductions will simply lead to an increase in emissions by other countries , a phenomenon known as ‘carbon leakage’, which has been a muchaddressed topic both in politics and in research for some two decades.6Indeed, it has been an important argument in the decision of the United States not to ratify the Kyoto Protocol. For example, U.S. senator Chuck Hagel – cosponsor of the 1997 Byrd-Hagel Resolution, which states that the U.S. Senate will not be a signatory to the Kyoto Protocol – argued that “[t]he main effect of the assumed policy [i.e. the Kyoto Protocol] would be to redistribute output, employment, and emissions from participating to non-participating countries” .7In this context, a Green Paradox is said to occur when global emissions increase in response to a unilateral emission reduction. 310 Oil DDW 2012 1 Yes Leakage – Competition With Oil Key 311 Last printed 9/4/2009 7:00:00 PM Oil DDW 2012 1 Inability to compete with oil causes low oil prices that rapidly accelerate consumption Jaakkola, doing doctoral research on the macroeconomics of oil depletion, Department of Economics, University of Oxford, 12 Niko Jaakkola, doing doctoral research on the macroeconomics of oil depletion, Department of Economics, University of Oxford, 530-12, [“Strategic oil supply and gradual development of substitutes,” Economic and Social Research Council, cowles.econ.yale.edu/conferences/2012/sum12/ma_jaakkola.pdf] E. Liu I have analysed strategic competition between a resource exporter, selling an exhaustible resource, and a resource-consuming country, able to gradually improve, with convex per-period costs, a perfect substitute to this. Per-period convex costs imply that the cost of developing the resource are optimally spread out across time. With incremental technological progress, the non-cooperative outcome features three stages. Initially, the resource is priced strictly below the substitute cost, with decreasing resource use (thus increasing resource price) over time. After the substitute becomes competitive, the resource exporter will price oil just below the substitute , in order to keep the substitute off the market . As technological progress keeps making substitutes cheaper, the resource exporter is forced to supply increasing quantities. The path of resource extraction is thus non-monotonic. Finally, once the resource is depleted, th...
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This note was uploaded on 01/30/2013 for the course ECON 101 taught by Professor Burke during the Spring '13 term at Southern Arkansas University.

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