The economics of exploiting gas hydrates

We investigate the optimal exploitation of methane hydrates, a recent discovery of methane resources under the sea floor, mainly located along the continental margins. Combustion of methane (releasing CO2) and leakage through blow-outs (releasing CH4) contribute to the accumulation of greenhouse gases. A second externality arises since removing solid gas hydrates from the sea bottom destabilizes continental margins and thus increases the risk of marine earthquakes. We show that in such a model three regimes can occur: i) resource exploitation will be stopped in finite time, and some of the resource will stay in situ, ii) the resource will be used up completely in finite time, and iii) the resource will be exhausted in infinite time. We also show how to internalize the externalities by policy instruments.