Optimal pollution control under emission constraitns: switching between regimes

In this paper we develop a model of pollution control which maximizes the present value of net social benefits. We show that the presence of an upper constraint on emissions affects the pollution control even when emissions are far below the level where the constraint binds. We get three main results. First, we find that for a society it is optimal to take into account the impact of the latent constraint at the outset and to modify the flow of emissions even when the constraint is still slack. Second, we analyze how the restriction works effectively in the intermediate phases before the constraint binds, comparing the unconstrained and constrained scenarios. Finally, we state the boundary conditions to compute the optimal trajectory of emissions switching between regimes. This trajectory cannot be obtained by simply pasting together the unconstrained and the constrained parts of the trajectories.