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Global Warming, Endogenous Risk, and Irreversibility

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  • Anthony Fisher
  • Urvashi Narain

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    Abstract

    This paper develops two-period analytical and numerical models to study the question: given a stock of greenhouse gases that poses a risk of future damages of unknown magnitude, and the possibility of learning about damages, how do sunk abatement capital and a nondegradable stock of greenhouse gases affect optimal first-period investment? We show that both affect investment, the former negatively and the latter positively. Additionally, endogenous risk – the risk of damages dependent on the stock of gases – results in an increase in optimal investment for any level of capital ‘sunkness’ or greenhouse gas degradability. Quantitatively, the effect of sunk capital is stronger than the effect of greenhouse gas irreversibility or that of endogenous risk. Copyright Kluwer Academic Publishers 2003

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    File URL: http://hdl.handle.net/10.1023/A:1025056530035
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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 25 (2003)
    Issue (Month): 4 (August)
    Pages: 395-416

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    Handle: RePEc:kap:enreec:v:25:y:2003:i:4:p:395-416

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    Web page: http://www.springerlink.com/link.asp?id=100263

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    1. Robert S. Pindyck, 1991. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
    2. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
    3. Graciela Chichilnisky & Geoffrey Heal, 1993. "Global Environmental Risks," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 65-86, Fall.
    4. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
    5. repec:fth:coluec:645 is not listed on IDEAS
    6. Schultz, Peter A & Kasting, James F, 1997. "Optimal reductions in CO2 emissions," Energy Policy, Elsevier, vol. 25(5), pages 491-500, April.
    7. William R. Cline, 1992. "Economics of Global Warming, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 39.
    8. Farzin, Y H & Tahvonen, O, 1996. "Global Carbon Cycle and the Optimal Time Path of a Carbon Tax," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 515-36, October.
    9. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
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