Optimal Emission Policy under the Risk of Irreversible Pollution
AbstractWe consider an optimal consumption and pollution problem that has two important features. Environmental damages due to economic activities may be irreversible and the level at which the degradation becomes irreversible is unknown. Particular attention is paid to the situation where agents are relatively impatient and/or do not care a lot about the environment and/or Nature regenerates at low rate. We show that the optimal policy of the uncertain problem drives the economy in the long run toward a steady state while, when ignoring irreversibility, the economy follows a balanced growth path accompanied by a perpetual decrease in environmental quality and consumption, both asymptotically converging toward zero. Therefore, accounting for the risk of irreversibility induces more conservative decisions regarding consumption and polluting emissions. In general, however, we cannot rule out situations where the economy will optimally follow an irreversible path and consequently, will also be left, in the long run, with an irreversibly degraded environment.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.14.
Date of creation: Feb 2011
Date of revision:
Optimal Control; Irreversibility Threshold; Uncertainty; Optimal Reversible; Irreversible Policy;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-05 (All new papers)
- NEP-ENE-2011-03-05 (Energy Economics)
- NEP-ENV-2011-03-05 (Environmental Economics)
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- Juana AZNAR-MARQUEZ & Jose-Ramon RUIZ-TAMARIT, 2012. "Sufficient and Necessary Conditions for Non-Catastrophic Growth," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2012027, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Fabien Prieur & Mabel Tidball & Cees A. Withagen, 2011.
"Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility,"
CESifo Working Paper Series
3512, CESifo Group Munich.
- Prieur, Fabien & Tidball, Mabel & Withagen, Cees, 2013. "Optimal emission-extraction policy in a world of scarcity and irreversibility," Resource and Energy Economics, Elsevier, vol. 35(4), pages 637-658.
- Fabien Prieur & Mabel Tidball & Cees Withagen, 2012. "Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility," OxCarre Working Papers 077, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
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