Environmental and Natural Resource Economics 2nd ed. Jonathan M. Harris Updates for 2012 Chapter 12: Non-Renewable Resources Copyright © 2012 Jonathan M. Harris

Figure 12.1: Classification of Nonrenewable Resources The implication of this standard resource classification diagram is that reserves are not fixed but variable, and can be expanded in two ways: by new discovery or by new technology and changing market conditions. The currently identified economic reserves may be only a small portion of the ultimately recoverable reserves.

Figure 12.2: Resource Rent for the Competitive Firm Unlike ordinary competitive firms, firms that produce non-renewable resources will not produce where P = MC, but will balance the resource rent available from producing today with the expected rent available from producing in the future. This implies that high-quality resources, with high recoverable rents, will be exploited first, while lower-grade resources are likely to be held in expectations of either higher prices or improved recovery technologies in the future.

Figure 12.3: Exhaustion of a Mineral Stock In theory, non-renewable resources should face eventual exhaustion. The price of the resource should rise over time (in accordance with Hotelling’s rule discussed in Chapter 5), while the quantity extracted should gradually decline, reaching zero when the “choke price”, or highest possible market price for the resource, is reached.

Figure 12.4: Hypothetical Nonrenewable Resource Use Profile The complete life cycle of a resource includes a period of declining prices and increasing consumption, followed eventually by rising prices and decreasing consumption. Until recently, it has appeared that we have been in Phase I or II, although recent evidence suggests that we may be moving into Phase III with rising prices for many resources (see later slides).

Figure 12.5: Change in World Reserve Base for Selected Minerals Even though production has risen steadily since 1950, reserves have increased, not decreased, due to new discovery and improved tachnology for resource recovery.

Figure 12-5 Supplement: U.S. Production of 3 Metals, 1950-2009 Production of most metals and minerals is still rising, as shown by U.S. production of three key metals. Source: USGS, 2010

Table 12.1: Reserve Estimates for Selected Minerals   Mineral Annual Consumption (thousand metric tons) Total Reserves (thousand metric tons) Reserve Base (thousand metric tons) Reserve Index (years) Reserve Base Index (years) Alumnium 103,625* 23,000,000 28,000,000 222 270 Cadmium 20 600 1,200 30 60 Copper 10,714 340,000 650,000 32 61 Iron Ore 959,609 71,000,000 160,000,000 74 167 Lead 5,342 64,000 130,000 12 24 Mercury 6.6 120 240 18 36 Nickel 882 49,000 150,000 56 170 Tin 218 9,600 12,000 44 55 Zinc 6,993 190,000 430,000 27 62 Source: Derived from World Resources Institute, 1994; and U.S. Geological Survey, 2001 *Annual consumption of bauxite ore. Reserve base estimates indicate that shortages are not imminent, although higher-quality reserves may run short in the relatively near future.

Figure 12.6: Price Trends for Selected Minerals After a long period of stable or declining prices, prices for key minerals rose rapidly in 2006-7, though they fell back somewhat in 2008-9. There is concern that prices are once again rising with some, such as copper, reaching new highs in 2011.

Figure 12-7a: Distribution of Mineral Ores in the Earth's Crust (smooth distribution) If resource reserves have a smoothly rising availability as resource grade declines, prices can be expected to rise gradually as better-quality reserves are mined out.

Figure 12.7b: Distribution of Mineral Ores in Earth’s Crust (uneven distribution) But if the distribution of reserves is uneven, there could be a dramatic price increase when better-quality reserves are mined out, and a jump to much lower-quality reserves is required.

Figure 12.8: Resource Price Profile with Environmental Costs Inclusion of environmental costs would alter the reserve price path, leading to an earlier shift to rising prices. This is especially true if indirect environmental costs, such as the costs of carbon emissions from energy used to recover resources, are included.

Figure 12-9: Resource Consumption with Backstop Resource and Recycling Expansion of resource recycling and substitution of backstop (ideally renewable) resources can stretch out the lifetime of a non-renewable resource.

Figure 12.10: Total Costs of Recycling This somewhat complex diagram compares the total costs of virgin and recycled resources. As the recycling proportion rises, costs of virgin materials and environmental/disposal costs fall. But the cost of recycled resources rises, especially as we attempt to reach the (impossible0 goal of 100% recycling). Thus the economic optimum, or least-cost, point, is found with partial recycling. The proportion recycled will rise if environmental and disposal costs are internalized to the producer.

Figure 12-11: Marginal Costs of Recycling The same principle is shown in a simpler form using marginal costs of virgin and recycled materials. Producers will tend to operate where these marginal costs are equalized, which will be at a higher level of recycling with internalization of environment costs.

Figure 12.12: U.S. Metals Consumption from Primary and Recycled Sources Even without aggressive policies to promote recycling, and increasing proportion of U.S. metals are recycled as a result of market incentives.

Figure 12.13: Scrap Metal as a Percentage of Total U.S. Consumption The proportion recycled is highest for lead, a durable metal with high environmental impacts from mining. About half of U.S. iron and steel, and 40% of aluminum, are recycled.