Pollution Reduction, Environmental Uncertainty, and the Irreversibility Effect
AbstractThis 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 InfoPaper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 9827.
Date of creation: 1998
Date of revision:
Stock externalities; Emission control; Irreversibilities; Uncertainty; Option value; Real options; Climate change;
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
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