Natural Resources as Assets
Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: David Kling, Oregon State University
Land Subsidence - The Forgotten Enigma of Groundwater (Over)Extraction
AbstractDepletion of groundwater resources is currently one of the main environmental problems worldwide. The major groundwater systems on earth face large overexploitations with serious associated quality and quantity problems. Impacts of groundwater depletion involve serious economic damages from declining water tables, damages to linked groundwater- ecosystems, and consequences of water quality deterioration. However, during recent years another problem related with groundwater depletion has been gaining importance and attention— land subsidence that occurs in areas with specific geological characteristics in association with groundwater exploitation. Despite the large socio-economic impacts of land subsidence most of its effects are still not well analyzed and not properly recognized and quantified. We collected information on land subsidence from 119 sites around the world and developed a land subsidence extent index. Then, we demonstrated qualitatively, using three case studies, the interaction between water extraction, land subsidence and their damages, and policy interventions to address it and their relative success. The overall results from the three case studies suggest that the effectiveness of policy intervention is determined by local conditions, including governance and regional economic development. Finally, we develop an optimization model of water extraction under conditions of land subsidence. The model is characterized by two sub problems corresponding to the phase before and after the occurrence of land subsides. The theoretical results suggest that the level of land subsidence impacts on both infrastructure and economic activities, and its impact on loss of storage capacity affect the behavior of the optimal path of the model, of minimizing such negative impacts. The extreme cases of very high values of these two impacts trigger the model to prevent irreversible damage (either in land subsidence impacts or in loss of storage capacity) by downscales extractions to the level that they will not affect land subsidence and remain within sub-problem 1.
A Tale of Two Roads: Groundwater Depletion in the North China Plains
AbstractGroundwater depletion is a major problem in China. This paper empirically studies the
eect of highway building on groundwater. The construction of a new highway changes the
incentive structure. Farmers located close to the highway gain an easier access to nearby
markets, either to sell their output or to buy input. This proximity may could induce people
to cultivate cash crops, such as fresh vegetables, which are more protable, but also more
To establish a causal relationship between water depletion and highway construction, road
placement needs to be exogenous to the economic activity. We consider two new national
highways crossing Lankao county. They were built at the turn of the century and run east-
west covering more than 4,400 km. We run an instrumental variable specication using
straight lines connecting the cities outside the county that are connected by the highway.
Using a unique GIS-referenced dataset of all the 12,160 tube wells in Lankao, we show
evidence of depletion close to these highways. We rst analyze the extensive margin, i.e.
the impact of highway construction on the number of new wells in their proximity and nd
that it increases by about 15%, after highway construction. Second, we study the intensive
margin, i.e. the impact of the construction of highways on the depth of the water table in
2011 and show that wells nearer to the highways exhibit higher depletion.
Using data from a household survey we conducted in 2014 and from satellite images, we
investigate the channels through which this depletion occurs. Closer to the highways we
observe a switch to more protable and water intensive crops. In their proximity, yields are
also higher for wheat and corn. These ndings suggest that the arrival of these highways
induced diversication and intensication of agriculture leading to increased depletion of
Valuing Multiple Natural Capital Stocks under Correlated Volatility
AbstractBioeconomic models can be used to value single and multiple coupled natural capital stocks as assets under real-world management conditions. We extend prior work that considered asset pricing and valuation for stocks linked through deterministic relationships (i.e. biophysical coupling or shared management) to assets with stochastic dynamics, including when there are multiple stocks with correlated stochastic processes. We derive asset prices for natural capital stocks governed by correlated diffusions and show how function approximation techniques can be used to approximate revealed shadow prices across the domain of capital stocks. We demonstrate the combined role of biophysical dynamics, the management feedback rule, and the properties of the intertemporal welfare (value) function for benefits flows in influencing risk's influence on revealed prices for natural assets. We examine how the interplay between the deterministic links between capital stocks (i.e. through ecological interactions) and their covariance terms can enhance or dampen substitutability/complementarity relationships that are at the heart of the sustainable management dilemma.
We make a number of theoretical contributions to the broader field of natural resource and real asset valuation, which can inform economic management. For a single stock, we identify two risk related influences on assets prices that enter through the capital gains term. The first term is as an \endogenous risk" effect that depends on the second derivative of the intertemporal welfare function. This terms reduces capital gains if investment in the stock increases the volatility. The other term is a \prudence" or precautionary savings term that emerges from the third derivative of the
intertemporal welfare function. This term reflects how changes in the stock influences the curvature of the intertemporal welfare function. Therefore, the term can also be thought of as a \self insurance" term - thereby formalizing the idea of \ecological insurance." Extending the theory to multiple correlated assets introduces \portfolio diversification" effects so that the capital gains term reflects the role of substitution and complementarity relationships between assets.
- Q3 - Nonrenewable Resources and Conservation
- D6 - Welfare Economics