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Pollution Control: When, and How, to be Precautious

Stergios Athanassoglou and Anastasios Xepapadeas
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Stergios Athanassoglou: Fondazione Eni Enrico Mattei and Euro-Mediterranean Center for Climate Change

Authors registered in the RePEc Author Service: Stergios Athanasoglou

No 2011.18, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The precautionary principle (PP) applied to environmental policy stipulates that, in the presence of physical uncertainty, society must take robust preventive action to guard against worst-case outcomes. It follows that the higher the degree of uncertainty, the more aggressive this preventive action should be. This normative maxim is explored in the case of a stylized dynamic model of pollution control under Knightian uncertainty. At time 0 a decision-maker makes a one-time investment in damage-control technology and subsequently decides on a desirable dynamic emissions policy. Adopting the robust control framework of Hansen and Sargent [10], we investigate optimal damage-control and mitigation policies. We show that optimal investment in damage control is always increasing in the degree of uncertainty, thus confirming the conventional PP wisdom. Optimal mitigation decisions, however, need not always comport with the PP and we provide analytical conditions that sway the relationship one way or the other. This result is interesting when contrasted to a model with fixed damage-control technology, in which it can be easily shown that a PP vis-a-vis mitigation unambiguously holds. We conduct a set of numerical experiments to determine the sensitivity of our results to specific functional forms of damage-control cost. We find that when the cost of damage-control technology is low enough, damage-control investment and mitigation may act as substitutes and a PP with respect to the latter can be unambiguously irrational.

Keywords: Risk; Ambiguity; Robust Control; Precautionary Principle; Pollution Control (search for similar items in EconPapers)
JEL-codes: C61 D80 D81 (search for similar items in EconPapers)
Date: 2011-02
New Economics Papers: this item is included in nep-agr, nep-env and nep-res
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Citations: View citations in EconPapers (2)

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