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WHEN SHOULD WE STOP EXTRACTING NONRENEWABLE RESOURCES?

Published online by Cambridge University Press:  30 July 2010

Ingmar Schumacher
Ingmar Schumacher*
Affiliation:
Banque centrale du Luxembourg
*
Address correspondence to: Ingmar Schumacher, Banque centrale du Luxembourg, 2 boulevard Royal, L-2983 Luxembourg; e-mail: [email protected].
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Abstract

This article analyzes an economy where both nonrenewable resources and a costly energy resource are essential inputs in production. The extraction of the nonrenewable resources leads to emissions that increase the probability of a catastrophe. We find that, in contrast to the constant-probability case, the endogenous probability of a catastrophe implies that some nonrenewable resources might optimally be left in the ground. The larger the effect of the fossil energy use on the probability of a catastrophe, the fewer nonrenewable resources should be extracted and the earlier should be the switch to the renewable substitute. The richer a country, the earlier it should shift to the energy substitute. In the trade-off between higher consumption and a higher probability of catastrophe, even small probability changes are likely to be more important for the planner than higher consumption.

Keywords

Nonrenewable ResourcesRenewable ResourcesEnergyCatastrophes
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 4 , September 2011 , pp. 495 - 512
Copyright
Copyright © Cambridge University Press 2010

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