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Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility

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  • Fabien Prieur
  • Mabel Tidball
  • Cees Withagen

Abstract

This paper extends the classical exhaustible-resource/stock-pollution model with the irreversibility of pollution decay. Within this framework, we answer the question how the potential irreversibility of pollution affects the extraction path. We investigate the conditions under which the economy will optimally adopt a reversible policy, and when it is optimal to enter the irreversible region. In the case of irreversibility it may be optimal to leave a positive amount of resource in the ground forever. As far the optimal extraction/emission policy is concerned, several types of solutions may arise, including solutions where the economy stays at the threshold for a while. Given that different programs may satisfy the first order conditions for optimality, we further investigate when each of these is optimal. The analysis is illustrated by means of a numerical example. To sum up, for any pollution level, we can identify a critical resource stock such that there exist multiple optima i.e. a reversible and an irreversible policy that yield exactly the same present value. For any resource stock below this critical value, the optimal policy is reversible whereas with large enough resource, irreversible policies outperform reversible programs. Finally, the comparison between irreversible policies reveals that it is never optimal for the economy to stay at the threshold for a while before entering the irreversible region.

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Bibliographic Info

Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 077.

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Date of creation: 2012
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Handle: RePEc:oxf:oxcrwp:077

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Keywords: non-renewable resource; irreversible pollution; optimal policy;

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Cited by:
  1. Daria Onori, 2013. "Optimal Growth under Flow-Based Collaterals," AMSE Working Papers 1331, Aix-Marseille School of Economics, Marseille, France, revised 21 May 2013.
  2. Ngo Van Long & Fabien Prieur & Klarizze Puzon & Mabel Tidball, 2013. "Markov Perfect Equilibria in Differential Games with Regime Switching Strategies," Working Papers 13-06, LAMETA, Universtiy of Montpellier, revised Jan 2014.
  3. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2012. "Optimal Regime Switching and Threshold Effects. Theory and Application to a Resource Extraction Problem under Irreversibility," AMSE Working Papers 1213, Aix-Marseille School of Economics, Marseille, France.
  4. Amigues, Jean-Pierre & Moreaux, Michel, 2013. "The atmospheric carbon resilience problem: A theoretical analysis," Resource and Energy Economics, Elsevier, vol. 35(4), pages 618-636.
  5. van der Ploeg, Frederick, 2014. "Abrupt positive feedback and the social cost of carbon," European Economic Review, Elsevier, vol. 67(C), pages 28-41.
  6. Amigues, Jean-Pierre & Moreaux, Michel, 2012. "Potential Irreversible Catastrophic Shifts of the Assimilative Capacity of the Environment," LERNA Working Papers 12.01.358, LERNA, University of Toulouse.

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