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Pollution Control: When, and How, to be Precautious

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  • Stergios Athanassoglou

    (Fondazione Eni Enrico Mattei and Euro-Mediterranean Center for Climate Change)

  • Anastasios Xepapadeas

    (Athens University of Economics and Business and Beijer Fellow)

Abstract

The precautionary principle (PP) applied to environmental policy stipulates that, in the presence of physical uncertainty, society must take robust preventive action to guard against worst-case outcomes. It follows that the higher the degree of uncertainty, the more aggressive this preventive action should be. This normative maxim is explored in the case of a stylized dynamic model of pollution control under Knightian uncertainty. At time 0 a decision-maker makes a one-time investment in damage-control technology and subsequently decides on a desirable dynamic emissions policy. Adopting the robust control framework of Hansen and Sargent [10], we investigate optimal damage-control and mitigation policies. We show that optimal investment in damage control is always increasing in the degree of uncertainty, thus confirming the conventional PP wisdom. Optimal mitigation decisions, however, need not always comport with the PP and we provide analytical conditions that sway the relationship one way or the other. This result is interesting when contrasted to a model with fixed damage-control technology, in which it can be easily shown that a PP vis-a-vis mitigation unambiguously holds. We conduct a set of numerical experiments to determine the sensitivity of our results to specific functional forms of damage-control cost. We find that when the cost of damage-control technology is low enough, damage-control investment and mitigation may act as substitutes and a PP with respect to the latter can be unambiguously irrational.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.18.

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Date of creation: Feb 2011
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Handle: RePEc:fem:femwpa:2011.18

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Keywords: Risk; Ambiguity; Robust Control; Precautionary Principle; Pollution Control;

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References

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  1. Giannis Vardas & Anastasios Xepapadeas, 2010. "Model Uncertainty, Ambiguity and the Precautionary Principle: Implications for Biodiversity Management," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 45(3), pages 379-404, March.
  2. Hansen, Lars Peter & Sargent, Thomas J. & Turmuhambetova, Gauhar & Williams, Noah, 2006. "Robust control and model misspecification," Journal of Economic Theory, Elsevier, vol. 128(1), pages 45-90, May.
  3. Hoel, Michael & Karp, Larry, 2001. "Taxes versus Quotas for a Stock Pollutant," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5fx9p7kf, Department of Agricultural & Resource Economics, UC Berkeley.
  4. Dockner Engelbert J. & Van Long Ngo, 1993. "International Pollution Control: Cooperative versus Noncooperative Strategies," Journal of Environmental Economics and Management, Elsevier, vol. 25(1), pages 13-29, July.
  5. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
  6. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
  7. Fidel Gonzalez, 2008. "Precautionary Principle and Robustness for a Stock Pollutant with Multiplicative Risk," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(1), pages 25-46, September.
  8. Takao Asano, 2010. "Precautionary Principle and the Optimal Timing of Environmental Policy Under Ambiguity," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(2), pages 173-196, October.
  9. Catarina Roseta-Palma & Anastasios Xepapadeas, 2004. "Robust Control in Water Management," Journal of Risk and Uncertainty, Springer, vol. 29(1), pages 21-34, 07.
  10. Gierlinger, Johannes & Gollier, Christian, 2008. "Socially Efficient Discounting under Ambiguity Aversion," IDEI Working Papers 561, Institut d'Économie Industrielle (IDEI), Toulouse.
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Cited by:
  1. William Brock & Anastasios Xepapadeas & Athanasios Yannacopoulos, 2014. "Spatiotemporal robust control in infinite dimensional spaces," DEOS Working Papers 1405, Athens University of Economics and Business.
  2. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Fundamental questions on the economics of climate adaptation: Outlines of a new research programme," UFZ Reports 05/2012, Helmholtz Centre for Environmental Research (UFZ).

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