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The consequences of irreversibility on optimal intertemporal emission policies under uncertainty

  • Thomas Dangl

    ()

  • Franz Wirl

    ()

This paper investigates how irreversibility affects optimal intertemporal emission policies when negative stock externalities exist. In particular it discusses the effect of irreversible emission, i.e., it concerns the physical issue whether it is possible to recollect pollutants that have been emitted or not. We depict our analysis with the greenhouse effect as a topical example and model the uncertainty with respect to the future evolution of the world’s temperature (i.e., the uncertain factor that determines the costs) as Itô-process with the drift provided by current carbon-dioxide emissions. We show analytically that irreversibility affects the optimal emission policy only if the future impact of today’s emissions is uncertain. Under uncertainty, irreversibility leads to a conservationist policy such that emissions are reduced at any level of environmental concentration of the pollutant. The level where stopping emissions is optimal decreases in the presence of irreversibility. Furthermore, the expected duration of fossil fuel use is derived. A numerical example which is calibrated to roughly reflect the global CO 2 problem illustrates the analytical findings. Copyright Springer-Verlag 2007

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File URL: http://hdl.handle.net/10.1007/s10100-007-0023-1
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Article provided by Springer & Slovak Society for Operations Research & Hungarian Operational Research Society & Czech Society for Operations Research & Österr. Gesellschaft für Operations Research (ÖGOR) & Slovenian Society Informatika - Section for Operational Research & Croatian Operational Research Society in its journal Central European Journal of Operations Research.

Volume (Year): 15 (2007)
Issue (Month): 2 (June)
Pages: 143-166

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Handle: RePEc:spr:cejnor:v:15:y:2007:i:2:p:143-166
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  1. Tahvonen, Olli, 1994. "Carbon dioxide abatement as a differential game," European Journal of Political Economy, Elsevier, vol. 10(4), pages 685-705, December.
  2. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
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  7. Wirl Franz, 1994. "Pigouvian Taxation of Energy for Flow and Stock Externalities and Strategic, Noncompetitive Energy Pricing," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 1-18, January.
  8. Pindyck, Robert S, 1980. "Uncertainty and Exhaustible Resource Markets," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1203-25, December.
  9. Gjerde, Jon & Grepperud, Sverre & Kverndokk, Snorre, 1999. "Optimal climate policy under the possibility of a catastrophe," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 289-317, August.
  10. Peck, Stephen C. & Teisberg, Thomas J., 1993. "Global warming uncertainties and the value of information: an analysis using CETA," Resource and Energy Economics, Elsevier, vol. 15(1), pages 71-97, March.
  11. Mendelsohn, Robert & Nordhaus, William D & Shaw, Daigee, 1994. "The Impact of Global Warming on Agriculture: A Ricardian Analysis," American Economic Review, American Economic Association, vol. 84(4), pages 753-71, September.
  12. Wirl, Franz & Dockner, Engelbert, 1995. "Leviathan governments and carbon taxes: Costs and potential benefits," European Economic Review, Elsevier, vol. 39(6), pages 1215-1236, June.
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