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Pollution Reduction, Environmental Uncertainty, and the Irreversibility Effect

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  • Saphores, Jean-Daniel M.

    ()

  • Carr, Peter

Abstract

This paper analyses the decision to invest to reduce the emissions of a stock pollutant under environmental uncertainty. It shows that this decision depends on the type and level of uncertainty. When uncertainty is small, there is no simple irreversibility effect because of the tension between environmental irreversibility (the stock of pollutant causes costly long-term social damages), and investment irreversibility (pollution abatement investments are sunk). When uncertainty is large enough, however, pollutant emissions should be curbed immediately. A continuous time formulation based on real options illustrates the link between flexibility and option value. These results have implications for global warming.

Suggested Citation

  • Saphores, Jean-Daniel M. & Carr, Peter, 1998. "Pollution Reduction, Environmental Uncertainty, and the Irreversibility Effect," Cahiers de recherche 9827, Université Laval - Département d'économique.
  • Handle: RePEc:lvl:laeccr:9827
    as

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    References listed on IDEAS

    as
    1. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9694, National Bureau of Economic Research, Inc.
    2. Bergstrom, Ted C. & Blume, Larry & Varian, Hal, 1992. "Uniqueness of Nash equilibrium in private provision of public goods : An improved proof," Journal of Public Economics, Elsevier, vol. 49(3), pages 391-392, December.
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    5. Kornhauser, Lewis A. & Revesz, Richard L., 1989. "Apportioning Damages Among Potentially Insolvent Actors," Working Papers 89-22, C.V. Starr Center for Applied Economics, New York University.
    6. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
    7. Winand Emons & Joel Sobel, 1991. "On the Effectiveness of Liability Rules when Agents are not Identical," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 375-390.
    8. Kornhauser, Lewis A & Revesz, Richard L, 1994. "Multidefendant Settlements under Joint and Several Liability: The Problem of Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 517-542, January.
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    More about this item

    Keywords

    Stock externalities; Emission control; Irreversibilities; Uncertainty; Option value; Real options; Climate change;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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