Double Irreversibility and Environmental Policy Design

Aude Pommeret () and Fabien Prieur

No 2009.10, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The design of environmental policy typically takes place within a framework in which uncertainty over the future impact of pollution and two different kinds of irreversibilities interact. The first kind of irreversibility concerns the sunk cost of environmental degradation; the second is related to the sunk cost of environmental policy. Clearly, the two irreversibilities pull in opposite directions: policy irreversibility leads to more pollution and a less/later policy while environmental irreversibility generates less pollution and a more/sooner policy. Using a real option approach and an infinite time horizon model, this paper considers both irreversibilities simultaneously. The model first is developed by paying particular attention to the option values related to pollution and policy adoption. Solving the model in closed form then provides solutions for both the optimal pollution level and the optimal environmental policy timing. Finally, the model is "calibrated" with the purpose of appraising which irreversibility has the prevailing effect and what is the overall impact of both irreversibilities on pollution and policy design.

Keywords: Environmental Policy; Environmental Irreversibility; Policy Irreversibility (search for similar items in EconPapers)
JEL-codes: D81 Q58 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-env
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Double Irreversibility and Environmental Policy Design (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2009.10

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