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Regime Shifts and Uncertainty in Pollution Control

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  • Aart de Zeeuw
  • Amos Zemel

Abstract

We develop a simple model of managing a system subject to pollution damage under risk of an abrupt and random jump in the damage coefficient. The model allows the full dynamic characterization of the optimal emission policies under uncertainty. The results, that imply prudent behavior due to uncertainty, are compared with the ambiguous outcomes reported in the literature for similar models. The differences are explained in terms of the properties of the damage function associated with each model. The framework is used to analyze the adaptation vs. mitigation dilemma and provides a simple criterion to determine whether adaptation activities should be undertaken promptly, delayed to some future date, or avoided altogether.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3697.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3697

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Keywords: environmental pollution; optimal management; catastrophic transitions; uncertainty; adaptation; mitigation;

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References

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  1. Van Der Ploeg, F. & De Zeeuw, A.J., 1990. "International Aspects Of Pollution Control," Papers 9065, Tilburg - Center for Economic Research.
  2. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
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  8. Yacov Tsur & Amos Zemel, 2009. "Endogenous Discounting and Climate Policy," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(4), pages 507-520, December.
  9. De Zeeuw, A. & Polasky, S. & Wagener, F.O.O., 2010. "Optimal Management with Potential Regime Shifts," CeNDEF Working Papers 10-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  14. Tsur, Yacov & Zemel, Amos, 1998. "Pollution control in an uncertain environment," Journal of Economic Dynamics and Control, Elsevier, vol. 22(6), pages 967-975, June.
  15. Tsur, Yacov & Zemel, Amos, 2001. "The infinite horizon dynamic optimization problem revisited: A simple method to determine equilibrium states," European Journal of Operational Research, Elsevier, vol. 131(3), pages 482-490, June.
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  18. Gollier, Christian & Treich, Nicolas, 2003. " Decision-Making under Scientific Uncertainty: The Economics of the Precautionary Principle," Journal of Risk and Uncertainty, Springer, vol. 27(1), pages 77-103, August.
  19. Zmarak Shalizi & Franck Lecocq, 2010. "To Mitigate or to Adapt: Is that the Question? Observations on an Appropriate Response to the Climate Change Challenge to Development Strategies," World Bank Research Observer, World Bank Group, vol. 25(2), pages 295-321, August.
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Citations

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Cited by:
  1. Rick van der Ploeg, 2012. "Breakthrough Renewables and the Green Paradox," CESifo Working Paper Series 3986, CESifo Group Munich.
  2. Ren, Bijie & Polasky, Stephen, 2014. "The optimal management of renewable resources under the risk of potential regime shift," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 195-212.
  3. Edilio Valentini & Paolo Vitale, 2014. "Optimal Climate Policy for a Pessimistic Social Planner," Working Papers 2014.33, Fondazione Eni Enrico Mattei.
  4. Frederick van der Ploeg & Aart de Zeeuw, 2013. "Climate Policy and Catastrophic Change: Be Prepared and Avert Risk," OxCarre Working Papers 118, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  5. Ute Kapaun & Martin Quaas, 2013. "Does the Optimal Size of a Fish Stock Increase with Environmental Uncertainties?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 54(2), pages 293-310, February.
  6. Lucas Bretschger & Alexandra Vinogradova, 2014. "Growth and Mitigation Policies with Uncertain Climate Damage," CEEES Paper Series CE3S-02/14, European University at St. Petersburg, Department of Economics.
  7. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 911-928.
  8. Frederick van der Ploeg, 2012. "Resource Wars and Confiscation Risk," OxCarre Working Papers 097, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  9. Frederick van der Ploeg, 2014. "Abrupt Positive Feedback and the Social Cost of Carbon," OxCarre Working Papers 122, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  10. de Frutos Cachorro, Julia & Erdlenbruch, Katrin & Tidball, Mabel, 2014. "Optimal adaptation strategies to face shocks on groundwater resources," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 134-153.
  11. Derek Lemoine & Christian Traeger, 2014. "Watch Your Step: Optimal Policy in a Tipping Climate," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 137-66, February.

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