Precautionary buffers and stochastic dependence in environmental policy

Jorge Holzer and Lars Olson

Journal of Environmental Economics and Management, 2021, vol. 106, issue C

Abstract: Against a backdrop of rising uncertainty driven by a warming climate, environmental policy has become increasingly reliant on precautionary buffers to safeguard public health, prevent irreversible environmental damages and limit the likelihood of exceeding critical thresholds. These probabilistic constraints are usually implemented under a separability assumption even though outcomes are often dependent. Examples include ambient air pollution and water quality standards, phytosanitary trade measures, and reference points in fisheries management. In this paper, we characterize how stochastic dependence among environmental variables influences environmental policy when the governing regulatory systems use probabilistic precautionary buffers. Our approach builds on Sklar's theorem and the copula representation of multivariate distributions and uses stochastic dependence orderings to compare policy design for different dependence structures including correlated, independent and separable risks. Dependence typically renders policy based on separability suboptimal and we characterize how policy should be adjusted in the presence of correlated risks. We illustrate the theory using fisheries management in the Gulf of Maine, one of the fastest-warming ocean ecosystems on the planet. In its multispecies fishery, even a mild positive correlation between stocks can result in a substantial reduction in effort limits if overfishing is to be avoided.

Keywords: Climate change; Copula; Orthant dependence; Precaution; Uncertainty (search for similar items in EconPapers)
JEL-codes: D61 D80 D81 Q22 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:106:y:2021:i:c:s0095069620301297

DOI: 10.1016/j.jeem.2020.102406

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