The Social Cost of Sub-Soil Resource Use

Tom Huppertz, Bo P. Weidema, Simon Standaert, Bernard De Caevel and Elisabeth van Overbeke
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Tom Huppertz: RDC Environment, 57 Avenue Gustave Demey, 1160 Brussels, Belgium
Bo P. Weidema: Danish Centre for Environmental Assessment, Aalborg University, Rendsburggade 14, 9000 Aalborg, Denmark
Simon Standaert: RDC Environment, 57 Avenue Gustave Demey, 1160 Brussels, Belgium
Bernard De Caevel: RDC Environment, 57 Avenue Gustave Demey, 1160 Brussels, Belgium
Elisabeth van Overbeke: RDC Environment, 57 Avenue Gustave Demey, 1160 Brussels, Belgium

Resources, 2019, vol. 8, issue 1, 1-17

Abstract: This paper presents a market-price-based method to value sub-soil resources in environmental Cost-Benefit Analysis and Life Cycle Assessment. The market price incorporates the privileged information of the market agents, explicitly or implicitly anticipating future applications of the resource, future backstop technologies, recycling potentials, the evolution of reserves and extraction costs. The market price is therefore considered as the best available integrated information reflecting the actual values of these parameters. Our method is based on the Hotelling rule and the fact that private agents discount future costs and benefits at a higher rate than society as a whole. In practice, the price of the last resource unit sold is calculated with the Hotelling rule using a market discount rate. Then, the price at depletion is retropolated with a social discount rate smaller than the market discount rate. The resulting corrected “socially optimal” price is higher than the market price. The method allows to calculate the social cost of resource exhaustion, which is applicable in Cost-Benefit Analysis and Life Cycle Assessment. The method is applied to mineral and fossil resources and the results are compared with other recent methods that seek to place a monetary value on resource depletion.

Keywords: Hotelling; resource depletion; price correction; extraction cost; social discount rate; external cost valuation (search for similar items in EconPapers)
JEL-codes: Q1 Q2 Q3 Q4 Q5 (search for similar items in EconPapers)
Date: 2019
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