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Pollution Reduction, Environmental Uncertainty, and the Irreversibility Effect

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  • Saphores, Jean-Daniel M.

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  • Carr, Peter
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    Abstract

    This paper analyses the decision to invest to reduce the emissions of a stock pollutant under environmental uncertainty. It shows that this decision depends on the type and level of uncertainty. When uncertainty is small, there is no simple irreversibility effect because of the tension between environmental irreversibility (the stock of pollutant causes costly long-term social damages), and investment irreversibility (pollution abatement investments are sunk). When uncertainty is large enough, however, pollutant emissions should be curbed immediately. A continuous time formulation based on real options illustrates the link between flexibility and option value. These results have implications for global warming.

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    Bibliographic Info

    Paper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 9827.

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    Date of creation: 1998
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    Handle: RePEc:lvl:laeccr:9827

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    Related research

    Keywords: Stock externalities; Emission control; Irreversibilities; Uncertainty; Option value; Real options; Climate change;

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