Irreversibilities and the Timing of Environmental Policy

By Robert S. Pindyck. 2000

372 citations recorded by the source corpus.

The standard framework in which economists evaluate environmental policies is cost-benefit analysis, so policy debates usually focus on the expected flows of costs and benefits, or on the choice of discount rate. But this can be misleading when there is uncertainty over future outcomes, when there are reversibilities, and when policy adoption can be delayed. This paper shows how two kinds of uncertainty over the future costs and benefits of reduced environmental degradation, and over the evolution of an ecosystem interact with two kinds of irreversibilities - sunk costs associated with an environmental regulation, and "sunk benefits" of avoided environmental degradation - to affect optimal policy timing and design.

Subfields: Economics and Econometrics, Environmental Engineering

View Paper: https://www.semanticscholar.org/paper/5cdac18764cc78702c62753dae7666086953ad3d

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Citations in the corpus

Resilience and sustainable development (2006, methodology): “Using the real options approach that has already been applied to emissions of greenhouse gases by Conrad (1997, 2000), Pindyck (2000, 2002) and Saphores and Carr (2000), he identifies the conditions in which it will be optimal to stop polluting activities, or when and for how long to call a…”
Uncertainty in Environmental Economics (2007, methodology): “4For example, Pizer (2003) modifies the DICE model developed by Nordhaus (1994a), replacing the original quadratic relationship between economic damage and temperature change with a function that is much more convex (and varies the degree of convexity).”
Optimal Diversity: Increasing Returns versus Recombinant Innovation (2008, background): “Pindyck (2000) examines the notion of optimal timing of environmental policy using real options theory.”
Uncertainty and Climate Change (2002, positive): “In Pizers (1998) model, the marginal beneÞt curve is relatively ßat compared to the marginal cost curve.”
Optimal CO2-abatement with Socio-economic Inertia and Induced Technological Change (2006, background): “There might be benefits from waiting given the sunk cost character of abatement (Pindyck, 2000, 2002), but there are also ir-reversibilities in the climate, calling for early action (Kolstad, 1996).”
Optimal timing problems in environmental economics (2002, methodology): “As in Pindyck (1996, 2000), I will work with a bare-bones model that captures the basic stock externality associated with many environmental problems in as simple a way as possible, while still allowing us to capture key sources of uncertainty.”
Evolutionary thinking in environmental economics (2007, background): “Economics has dealt with this problem through option value (Fisher, 2000) and real options theory (Dixit and Pindyck, 1994; Pindyck, 2000).”
Uncertain Outcomes and Climate Change Policy (2012, methodology): “Finally, to explore the case for a stringent abatement policy, I focus on conservative parameter assumptions, in the sense of leading to a higher WTP. 13As a practical matter, I calculate WTP using a finite horizon of 500 years.”