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Double Irreversibility and Environmental Policy Design

Author

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  • Pommeret, Aude
  • Prieur, Fabien

Abstract

The design of environmental policy typically takes place within a framework in which uncertainty over the future impact of pollution and two different kinds of irreversibilities interact. The first kind of irreversibility concerns the sunk cost of environmental degradation; the second is related to the sunk cost of environmental policy. Clearly, the two irreversibilities pull in opposite directions: policy irreversibility leads to more pollution and a less/later policy while environmental irreversibility generates less pollution and a more/sooner policy. Using a real option approach and an infinite time horizon model, this paper considers both irreversibilities simultaneously. The model first is developed by paying particular attention to the option values related to pollution and policy adoption. Solving the model in closed form then provides solutions for both the optimal pollution level and the optimal environmental policy timing. Finally, the model is "calibrated" with the purpose of appraising which irreversibility has the prevailing effect and what is the overall impact of both irreversibilities on pollution and policy design.

Suggested Citation

  • Pommeret, Aude & Prieur, Fabien, 2009. "Double Irreversibility and Environmental Policy Design," Sustainable Development Papers 50359, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemdp:50359
    DOI: 10.22004/ag.econ.50359
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    File URL: http://ageconsearch.umn.edu/record/50359/files/10-09.pdf
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    Cited by:

    1. Prudence Dato, 2017. "Energy Transition Under Irreversibility: A Two-Sector Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(3), pages 797-820, November.
    2. MosiƱo, Alejandro, 2012. "Producing energy in a stochastic environment: Switching from non-renewable to renewable resources," Resource and Energy Economics, Elsevier, vol. 34(4), pages 413-430.

    More about this item

    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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