Policy Adoption Rules and Global Warming

Although there is widespread agreement about the dangers of global warming and the resulting need to cut down emissions, there does not seem to be general agreement about the exact form the policy should take or the timing of its adoption. Failure to adopt and implement policies against global warming reflects the complexity of the problem, the uncertainties of climate change and the cost of policy adoption. Issues associated with the interactions between uncertainties and irreversibilities in determining the timing of policy adoption are analyzed by using the methodology of optimal stopping rules. Optimal policy functions are derived for cooperative and noncooperative solutions, with differential game representation. Issues associated with the empirical application of the optimal policy rules are also considered.     

Pollution Accumulation and Firm Incentives to Accelerate Technological Change Under Uncertain Private Benefits

The paper explores the relationships between the design of public incentives and the policy-maker's desired timing of abandonment of a polluting technology, when this requires an irreversible private investment and the firm faces uncertain appropriable benefits from the technological change. Two regulatory approaches are examined. Firstly, we consider the quite common one of lowering the private investment cost, through a subsidy, in order to bridge the gap between the private and the policy-maker's desired timing of environmental innovation. Secondly, we consider a policy scenario where the regulator, instead of simply lowering the investment's rental price, also stimulates abandonment of the polluting technology by reducing – through appropriate announcements – the uncertainty surrounding the technological switch's private profitability. We then compare the two approaches and show the latter's benefits, in terms of the policy's effectiveness and/or budgetary savings.     

Irreversibility of Pollution Accumulation

This paper presents an optimal endogenous growth model with pollutionaccumulation and abatement activities which analyzes the implications ofpollution accumulation irreversibility on the existence of sustainablegrowth paths. This model studies different pollution-decay functions whichpresent, among others, the feature that a sufficiently high pollution stocklevel can reduce the rate of decay to zero. This study shows that this newfeature, which gains support for the biological literature, significantlyalters the traditional results on the properties of sustainable endogenousgrowth by reducing the field of existence and strengthening the role ofindividual preferences.     

HOW ASSET IRREVERSIBILITY INFLUENCES THE INVESTMENT‐UNCERTAINTY RELATIONSHIP

This paper examines how uncertainty affects firms' investments for varying degrees of asset irreversibility (i.e., the wedge between purchase price and liquidation value of an asset). To identify more or less irreversible capital goods, we exploit unique survey data on German manufacturing firms over the sample period 2004 to 2012 in which managers provide information on investments' purpose (capacity expansion, replacement, restructuring, rationalization, and other). Our results indicate that only investments into the most irreversible capital goods (capacity expansion) will decrease if uncertainty rises. We also find support for other channels, such as the financial friction or the market power channel, to explain the investment‐uncertainty relationship.     

Climate Change and the Irreversibility Effect – Combining Expected Utility and MaxiMin

This paper analyzes decisions on emissions of a stock pollutant under uncertaintyin a two period model. Decisions are based on a weighted average of expected utility (EU) and the MaxiMin criterion. I first show that more weight on the worst case (less weight on EU) may lead to increased first period emissions. The effect of learning possibilities on emissions is not clear in general, but depends qualitatively on the weight given to MaxiMin: For the quadratic utility case, considering prospective learning increases today's abatement effort, i.e. the irreversibility effect holds, if the weight on EU is small. This contrasts standard results on the irreversibility effect for EU which translates to small weights on MaxiMin. There is, however, the possibility of a negative value of learning. It is shown that the irreversibility effect holds if and only if thevalue of learning is negative. Consequences for the applicability of generalized EU-MaxiMin are discussed.     

不可逆性、补偿机制与能源代际公平

目前,以当代人利益为核心的能源投资、研发和能源结构决策,在一定程度上忽视了后代人的利益,从而危及到能源的代际公平。本文从决策不可逆性的视角出发,剖析了当代能源决策对能源代际公平造成的不良后果,然后在"帕累托改进"思路的基础上,试图通过建立相应的代际补偿机制,消除当代人对后代人利益的侵蚀,最大限度地实现能源的代际公平。     

Evolutionary Theories in Environmental and Resource Economics: Approaches and Applications

Recent advances in evolutionary theory have important implications for environmental economics. A short overview is offered of evolutionarythinking in economics. Subsequently, major concepts and approaches inevolutionary biology and evolutionary economics are presented andcompared. Attention is devoted, among others, to Darwinian selection,punctuated equilibrium, sorting mechanisms, Lamarckian evolution,coevolution and self-organization. Basic features of evolution, such assustained change, irreversible change, unpredictability, qualitativechange and disequilibrium, are examined. It is argued that there are anumber of fundamental differences as well as similarities betweenbiological and economic evolution. Next, some general implications ofevolutionary thinking for environmental economics are outlined. This isfollowed by a more detailed examination of potential uses ofevolutionary theories in specific areas of environmental economics,including sustainability and long run development theories, technologyand environment, ecosystem management and resilience, spatial evolutionand environmental processes, and design of environmental policy.     

GROUNDWATER MANAGEMENT THROUGH COLLECTIVE PARTICIPATION: WHY SOME INSTITUTIONS SUCCEED AND OTHERS FAIL?

In response to prolonged drought situations, water collectives have been promoted and exist in most water scarce farming regions to help them sustainably manage groundwater resources. However, the sustainability of the collectives itself is prone to groundwater depletion and to the risk of its irreversible future loss. The role of groundwater loss risk in determining the success or failure of groundwater collectives is inadequately understood. In this paper, a stylized dynamic optimization model of institutional participation is developed and results are analyzed for several cases of collective and non‐collective farming behaviour. Results indicate that risk of groundwater loss may increase the tendency to free ride and exacerbate its depletion. This tendency may increase with a larger collective size when there are no deterrence mechanisms in place. However, when staying out threatens institutional stability, it is optimal for the profit maximizing farmer to join the collective and help with groundwater conservation.     

The Economics of Non-Convex Ecosystems: Introduction

The word “convexity” is ubiquitous in economics, but absent fromeconomics. In this paper we explain why, and show what differenceit makes to economic analysis if ecosystem non-convexities aretaken seriously. A simple proof is provided of the connectionbetween “self-similarity” and “power laws”. We also provide anintroduction to each of the papers in the Symposium and draw outthe way in which they form a linked set of contributions.