Transboundary pollution control and environmental absorption efficiency management

Fouad El Ouardighi (), Konstantin Kogan, Giorgio Gnecco and Marcello Sanguineti
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Fouad El Ouardighi: ESSEC Business School
Konstantin Kogan: Bar-Ilan University
Giorgio Gnecco: IMT - School for Advanced Studies
Marcello Sanguineti: University of Genova

Annals of Operations Research, 2020, vol. 287, issue 2, No 6, 653-681

Abstract: Abstract In this paper, we suggest a two-player differential game model of transboundary pollution that accounts for time-dependent environmental absorption efficiency, which allows the biosphere to switch from a carbon sink to a source. We investigate the impact of negative externalities resulting from a transboundary pollution non-cooperative game wherein countries are dynamically involved. Based on a linear-quadratic specification for the instantaneous revenue function, we assess differences related to both transient path and steady state between cooperative solution, open-loop and Markov perfect Nash equilibria (MPNE). Regarding the methodological contribution of the paper, we suggest a particular structure of the conjectured value function to solve MPNE problems with multiplicative interaction between state variables in one state equation, so that third-order terms that arise in the Hamilton–Jacobi–Bellman equation are made negligible. Using a collocation procedure, we confirm the validity of the particular structure of the conjectured value function. The results suggest unexpected contrasts in terms of pollution control and environmental absorption efficiency management: (i) in the long run, an open-loop Nash equilibrium (OLNE) allows equivalent emissions to the social optimum but requires greater restoration efforts; (ii) although an MPNE is likely to end up with lower emissions and greater restoration efforts than an OLNE, it has a much greater chance of falling in the emergency area; (iii) the absence of cooperation and or precommitment becomes more costly as the initial absorption efficiency decreases; (iv) more heavily discounted MPNE strategies are less robust than OLNE to prevent irreversible switching of the biosphere from a carbon sink to a source.

Keywords: Transboundary pollution; Environmental absorption efficiency; Hamilton–Jacobi–Bellman approximation (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s10479-018-2927-7

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