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CEJOR (2007) 15:143166
DOI 10.1007/s10100-007-0023-1
ORIGINAL PAPER
Published online: 9 June 2007 Springer-Verlag 2007
Abstract 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 worlds temperature (i.e., the uncertain factor that determines the costs) as It-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 todays 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 reect the global CO2 problem illustrates the analytical ndings.
Keywords Optimal taxation Optimal resource allocation
JEL Classication Q48 D81 C61
T. Dangl (B)
Institute of Management Science, Vienna University of Technology, Theresianumgasse 27, 1040 Vienna, Austriae-mail: [email protected]
F. Wirl
Department of Business Studies, University of Vienna, Brnner Strae 72, 1210 Vienna, Austriae-mail: [email protected]
The consequences of irreversibility on optimal intertemporal emission policies under uncertainty
Thomas Dangl Franz Wirl
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144 T. Dangl,F.Wirl
1 Introduction
Irreversibility and uncertainty play a crucial role in the context of environmental issues such as the discussion about optimal emission policies. When emitting a pollutant to the environment, it is often uncertain what the future consequences (or social costs) of this practice actually are. Further, due to physical constraints the act of emitting the pollutant itself might be irreversible in the sense that it is impossible to recollect the pollutant once it is dissolved to the environment (for example, think of the global contamination of the biosphere with the pesticide DDT).
The greenhouse effect and the globally optimal CO2 emission policy1 are one topical example which is currently discussed on an supranational level (Kyoto process for controlling greenhouse gas emission). Therefore, we develop our analysis along...