Avoiding Nature-Sensitive Oil Extraction
Oil activity in the arctic region entails many global risks: avoiding exploration and extraction of oil resource in the arctic is advocated as in key fighting climate change; oil extraction entails large risks for the vulnerable arctic eco-systems; and the extraction of these resources is a key driver of geopolitical tension in the arctic. This project studies the strategies a country bordering the arctic (e.g., Norway) can employ to avoid that other arctic countries (e.g., Russia) explore and extract arctic resources. The project focuses on the role of technology spillovers.
Arctic oil activity requires specific technology which is largely undeveloped to date. Naturally, the size of the market for these technologies determines how much will be invested in their development and hence how affordable arctic oil activity will be. By staying out of the arctic a country that cares for the environment and geopolitical calm can make it less affordable and hence tip another country to not entering the arctic. This can make it less tempting for another country to enter and so on. Hence, if one country stays out of the arctic this may create a chain reaction where all stay out. We study the circumstances under which such a chain-reaction can be started and what further communication strategies an environmentally-conscious country can employ.
The model is calibrated using real-world data on oil prices, extraction costs and Arctic oil resources and it is shown that a country such as Norway may be pivotal in preventing others from entering – should it want to.