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Fundamental Economics of Depletable Energy Supply - page 18 / 30





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Resources for the Future

Krautkraemer and Toman

While less extraction would moderate the depletion effect on cost, it is still likely that total recovery of the energy resource will fall over time as a result of the tax. In particular, reserves that were formerly marginally economic to extract become sub-economic. Moreover, the tax would reduce the return to investment in new reserves (Deacon 1993).

The extraction and consumption of energy resources are associated with a wide variety of environmental externalities. The effect of externalities on the market's depletion path can depend upon the exact nature of the externality. There are two broad categories of externalities: flow externalities and stock externalities. Flow externalities represent a situation in which the environmental damage is a function of the current rate of energy production or consumption. An example relevant to energy supply would be the air pollution by-products of energy use in the process of mining. More persistent stock externalities arise when the environmental damage is a function of cumulative emissions. Examples of more persistent externalities would include atmospheric accumulation of carbon dioxide and its effect on the global climate, contamination of ground water from oil or coal extraction that is only slowly reversed by natural processes, and unremediated damage to natural landscapes through strip mining.

Flow externalities can result in a depletion rate that is too rapid or too slow relative to the socially efficient supply rate, depending upon how the present value of the marginal external damage changes over time. The effect of stock externalities is similar to the impact of resource depletion on the cost of extraction: these stock effects imply a slower rate of depletion and less total depletion than the market would choose on its own.

6. Empirical Analysis of Depletable Energy Supply

Efforts to empirically test the theoretical implications of resource depletion models as descriptions of observed energy supply behavior are hampered by a lack of data. Data for in situ reserve values are not readily available. Market data on the value of firms are generally available, but exclude depletable resource values, and data on extraction and development costs are usually proprietary information. Consequently, the empirical economic analysis of resource supply and scarcity has taken a variety of less direct paths. Analysts have attempted in a number of ways to use available data to construct dynamic empirical models based on the basic


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