A Bird in the Hand is Worth Two in the Bush? When Do We Prefer Something Certainly Dirty to Something Perhaps Clean?
We analyze the problem of introducing a new substitute for a polluting process. The environmental effects of this substitute are uncertain but will be resolved over time. In a two-period model where two stock pollutants are substitutes in the abatement cost function, we show that the consequences of uncertainty depend critically on the degree of substitutability. As opposed to independent pollutants, for potentially large damages a further increased level of uncertainty leads to a decrease in risky emissions at the expense of emitting more of the old pollutant with known environmental effects. We illustrate how the effects of revealed uncertainty on the emission levels are affected by increasing substitutability.
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