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Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility

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  • Fabien Prieur
  • Mabel Tidball
  • Cees A. Withagen

Abstract

This paper extends the classical exhaustible-resource/stock-pollution model with irreversibility of pollution decay, meaning that after reaching some threshold there is no decay of the pollution stock. Within this framework, we answer the question how the potential irreversibility of pollution affects the extraction path. We investigate the conditions under which the economy will optimally adopt a reversible policy, and when it is optimal to enter the irreversible region. In the case of irreversibility it may be optimal to leave a positive amount of resource in the ground forever. As far as the optimal extraction/emission policy is concerned, several types of solutions may arise, including solutions where the economy stays at the threshold for a while. Given that different programs may satisfy the first order conditions for optimality, we further investigate when each of these is optimal. The analysis is illustrated by means of a calibrated example. To sum up, for any pollution level, we can identify a critical resource stock such that there exist multiple optima i.e. a reversible and an irreversible policy that yield exactly the same present value. For any resource stock below this critical value, the optimal policy is reversible whereas with large enough resources, irreversible policies outperform reversible programs. Finally, the comparison between irreversible policies reveals that it is never optimal for the economy to stay at the threshold for a while before entering the irreversible region.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-07/cesifo1_wp3512.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3512.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3512

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Keywords: non-renewable resource; irreversible pollution; optimal policy;

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References

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Cited by:
  1. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2012. "Optimal regime switching and threshold effects: theory and application to a resource extraction problem under irreversibility," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 12.02, Université de Lausanne, Faculté des HEC, DEEP.
  2. Amigues, Jean-Pierre & Moreaux, Michel, 2013. "The atmospheric carbon resilience problem: A theoretical analysis," Resource and Energy Economics, Elsevier, vol. 35(4), pages 618-636.
  3. Amigues, Jean-Pierre & Moreaux, Michel, 2012. "Potential Irreversible Catastrophic Shifts of the Assimilative Capacity of the Environment," IDEI Working Papers 697, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Daria Onori, 2013. "Optimal Growth under Flow-Based Collaterals," AMSE Working Papers 1331, Aix-Marseille School of Economics, Marseille, France, revised 21 May 2013.
  5. Rick Van der Ploeg, 2013. "Abrupt Positive Feedback and the Social Cost of Carbon," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.
  6. Ngo Van Long & Fabien Prieur & Klarizze Puzon & Mabel Tidball, 2013. "Markov Perfect Equilibria in Differential Games with Regime Switching Strategies," Working Papers 13-06, LAMETA, Universtiy of Montpellier, revised Jan 2014.

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