Association for Public Policy Analysis & Management

One of the most critical links sustainability studies must make as a field is with security. Security studies is incorporating climate change science to improve near- to medium-term planning. Now climate studies must also increasingly incorporate security studies.

We theorize that IPCC models are under-predicting the social cost of carbon because of uncertainty in calculating the cost of (1) violence due to climate change and (2) the impact of violence on climate forcing. We test this theory by estimating the effect of violent Hotelling pressures.

Hotelling (1939) famously predicted that owners of exhaustible fossil fuel resources would maximize the total value of their property by maximizing the NPV of all cash flows over the life of the asset. Sinn (2008) elaborated on this prediction in the context of owners suffering increasing chances of losing their property in future periods due to civil violence and war, arguing that they would rationally increase short-term output to hedge against a more uncertain future.

While the “green paradox” literature has studied the tax impacts of Hotelling pressures, they are missing the equally compelling and important risk impacts of these violent Hotelling pressures. We see these risk impact dynamics today in an increasing unstable Middle East. Prevailing violence from civil war in Libya and Sudan, civil unrest and violence in Egypt, civil war in Yemen, the rise of ISIS in Syria, and a fractured and uncertain Iraq have cast a pall of fear and uncertainty over resource owners.

We hypothesize that nation states and energy firms alike are responding with fire-sale attitudes, refusing to pull back production despite a glut market. We test this hypothesis by compiling an original dataset of Middle East oil production, with corresponding distances to each reported terrorism event over a multiyear period. We calculate the effect of each violent episode on oil production and show the extent to which international turmoil is driving the current era of cheap oil—and by extension, the persistently high level of costly carbon emissions.