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Global Warming, Endogenous Risk, and Irreversibility

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  • Anthony Fisher
  • Urvashi Narain

Abstract

This paper develops two-period analytical and numerical models to study the question: given a stock of greenhouse gases that poses a risk of future damages of unknown magnitude, and the possibility of learning about damages, how do sunk abatement capital and a nondegradable stock of greenhouse gases affect optimal first-period investment? We show that both affect investment, the former negatively and the latter positively. Additionally, endogenous risk – the risk of damages dependent on the stock of gases – results in an increase in optimal investment for any level of capital ‘sunkness’ or greenhouse gas degradability. Quantitatively, the effect of sunk capital is stronger than the effect of greenhouse gas irreversibility or that of endogenous risk. Copyright Kluwer Academic Publishers 2003

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  • Anthony Fisher & Urvashi Narain, 2003. "Global Warming, Endogenous Risk, and Irreversibility," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(4), pages 395-416, August.
    • Handle: RePEc:kap:enreec:v:25:y:2003:i:4:p:395-416
    DOI: 10.1023/A:1025056530035
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    Cited by:

    1. Karp, Larry & Zhang, Jiangfeng, 2006. "Regulation with anticipated learning about environmental damages," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 259-279, May.
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    3. Baylis, Katherine R. & Vercammen, James, 2006. "Scientific Uncertainty and Climate Change Policy," 2006 Annual meeting, July 23-26, Long Beach, CA 21267, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Arun S. Malik & Stephen C. Smith, 2012. "Adaptation To Climate Change In Low-Income Countries: Lessons From Current Research And Needs From Future Research," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-22.
    5. Pindyck, Robert S., 2012. "Uncertain outcomes and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 289-303.
    6. Timo Kuosmanen & Marita Laukkanen, 2011. "(In)Efficient Environmental Policy with Interacting Pollutants," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(4), pages 629-649, April.
    7. Robert S. Pindyck, 2006. "Uncertainty In Environmental Economics," NBER Working Papers 12752, National Bureau of Economic Research, Inc.
    8. Peterson, Sonja, 2006. "Uncertainty and economic analysis of climate change: a survey of approaches and findings," Open Access Publications from Kiel Institute for the World Economy 3778, Kiel Institute for the World Economy (IfW Kiel).
    9. van den Bergh, Jeroen C. J. M., 2004. "Optimal climate policy is a utopia: from quantitative to qualitative cost-benefit analysis," Ecological Economics, Elsevier, vol. 48(4), pages 385-393, April.
    10. Antony Millner & H�l�ne Ollivier & Leo Simon, 2013. "Political competition, learning and the consequences of heterogeneous beliefs for long-run public projects," GRI Working Papers 104, Grantham Research Institute on Climate Change and the Environment.
    11. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W. H. Parry & William A. Pizer, 2010. "Designing Climate Mitigation Policy," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 903-934, December.
    12. Hiroaki Sakamoto, 2010. "Intergenerationally Equitable Discounting and its Implications for Climate Policy," Discussion papers e-09-004, Graduate School of Economics Project Center, Kyoto University.
    13. Elizabeth Kopits & Alex L. Marten & Ann Wolverton, 2013. "Moving Forward with Incorporating "Catastrophic" Climate Change into Policy Analysis," NCEE Working Paper Series 201301, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Jan 2013.
    14. Tsur, Yacov & Zemel, Amos, 2006. "Welfare measurement under threats of environmental catastrophes," Journal of Environmental Economics and Management, Elsevier, vol. 52(1), pages 421-429, July.
    15. Kuosmanen, Timo & Laukkanen, Marita, 2009. "(In)Efficient Management of Interacting Environmental Bads," Discussion Papers 54287, MTT Agrifood Research Finland.
    16. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.
    17. In Hwang & Frédéric Reynès & Richard Tol, 2013. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(3), pages 415-436, November.
    18. Gallo, Mariano, 2011. "A fuel surcharge policy for reducing road traffic greenhouse gas emissions," Transport Policy, Elsevier, vol. 18(2), pages 413-424, March.
    19. Lin, Tyrone T. & Ko, Chuan-Chuan & Yeh, Hsin-Ni, 2007. "Applying real options in investment decisions relating to environmental pollution," Energy Policy, Elsevier, vol. 35(4), pages 2426-2432, April.
    20. Derek Lemoine & Sabine Fuss & Jana Szolgayova & Michael Obersteiner & Daniel Kammen, 2012. "The influence of negative emission technologies and technology policies on the optimal climate mitigation portfolio," Climatic Change, Springer, vol. 113(2), pages 141-162, July.
    21. Hackl, Franz & Pruckner, Gerald J., 2003. "How global is the solution to global warming?," Economic Modelling, Elsevier, vol. 20(1), pages 93-117, January.
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    23. Makropoulou, Vasiliki & Dotsis, George & Markellos, Raphael N., 2013. "Environmental policy implications of extreme variations in pollutant stock levels and socioeconomic costs," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 417-428.

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