Optimal timing problems in environmental economics

By Robert S. Pindyck. 2002

261 citations recorded by the source corpus.

Abstract Because of the uncertainties and irreversibilities that are often inherent in environmental degradation, its prevention, and its economic consequences, environmental policy design can involve important problems of timing. I use a simple two-period model to illustrate these optimal timing problems and their implications for environmental policy. I then lay out and solve a continuous-time model of policy adoption in which the policy itself entails sunk costs, and environmental damage is irreversible. The model generalizes earlier work in that it includes two stochastic state variables; one captures uncertainty over environmental change, and the other captures uncertainty over the social costs of environmental damage. Solutions of the model are used to show the implications of these two types of uncertainty for the timing of policy adoption.

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/a1aea557dc5529538402ec33c59ffd3004cf08fa

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Citations in the corpus

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).”
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…”
A Review of the Stern Review (2006, background): “14 Note that this is not in contradiction to real option theory ( Pindyck, 2002 ), because the intensity of climate policy (as, for example, measured by the price of carbon emission permits) is continuous, and because there are irreversibilities in both emission reduction and climate change.”
Uncertain Outcomes and Climate Change Policy (2012, background): “See, for example, Kolstad (19996b), Gollier, Jullien and Treich (2000), and Fisher and Narain (2003), who use two-period models for tractability; and include Kolstad (1996a), Pindyck (2000, 2002) and Newell and Pizer (2003), who use multi-period or continuous-time models.”
Agreeing on Robust Decisions: New Processes for Decision Making Under Deep Uncertainty (2014, unknown): “To help make this type of decision, some have proposed to mobilize the “real option,” which was initially developed for financial markets (Arrow and Fisher 1974; Henry 1974; Ha-Duong 1998; Pindyck 2001; Gollier C. and Treich N. 2003).”
Uncertainty in Environmental Economics (2007, background): “The extension to environmental policy (and the ‘‘good news principle’’ discussed below) is in Pindyck (2002). simplifying assumptions, and different sets of simplifying assumptions have led to quite different results.”