Is the discovery of oil a blessing or curse in the era of climate change?

Abstract

The decades-old question of whether oil is a blessing or a curse to countries that discover it has received much attention in the literature on energy and resource economics and policy. Despite the contributions of the resource curse literature and its critique, the global consensus to address climate change by reducing emissions from fossil fuels poses a new challenge to the extractives-led growth strategies. This research analyzes the ways oil discoveries influence carbon emissions differently in countries with contrasting institutional quality. Our results show that the significant and intensifying treatment effects of finding oil over time lead to an increase in carbon emissions in low institutional quality countries, while such effect is not significant in high institutional quality countries. The carbon curse triggered by detrimental effects of low institutional quality encourages improving a government’s ability to provide sound policies and regulations to promote private sector development. Such ability is the focal point between neoclassical economics and developing societies that served to reveal the institutional underpinnings of market economies for high-quality growth. Beside high-quality growth, our finding reveals supplementary motivation for the quality of government, which helps mitigate the carbon curse triggered by finding oil.