Production-Based Pollution vs. Deforestation: Optimal Policy with State-Independent and -Dependent Environmental Absorption Efficiency Restoration Process

An important yet largely unexamined issue is how the interaction between deforestation and pollution affects economic and environmental sustainability. This article seeks to bridge the gap by introducing a dynamic model of pollution accumulation where polluting emissions can be mitigated and the absorption efficiency of pollution sinks can be restored. We assume that emissions are due to a production activity, and we include deforestation both as an additional source of emissions and as a cause of the exhaustion of environmental absorption efficiency. To account for the fact that the switching of natural sinks to a pollution source can be either possible, and in such a case even reversible, or impossible, we consider that restoration efforts can be either independent from or dependent on environmental absorption efficiency, i.e., state-independent versus state-dependent restoration efforts. We determine (1) whether production or deforestation is the most detrimental from environmental and social welfare perspectives, and (2) how state-dependent restoration process affects pollution accumulation and deforestation policies and the related environmental and social welfare consequences.