Chapter 20 Optimal Abatement Investment and Environmental Policies Under Pollution Uncertainty

Abstract

In this paper we present a continuous time model with reversible abatement capital in order to analyze the effects of environmental policies on the value of the firm and investment decisions. We show that the effects depend on what sort of future policy are implemented. We focus on investment effects of changes in corrective taxes to control the use of polluting inputs, and subsidies to promote abatement investment. We show that (1) while taxes have a depressive effect on capital accumulation, subsidies boost investment; (2) the impact of these policies on the value of the firm is ambiguous. This latter result has important empirical implications insofar as investment are based on the average value of the firm rather than the (unobservable) marginal value.

Pollution Control Under Uncertainty and Sustainability Concern

“…2 Very few papers analyze economic dynamics in a framework of stochastic pollution (Kijima et al 2011;Saltari and Travaglini 2011;Privileggi and Marsiglio 2013). However, differently from our goals, these works either do not focus on environmental policy (Privileggi and Marsiglio 2013), or take it exogenously given (Kijima et al 2011) or assume the evolution of pollution to be completely exogenous (Saltari and Travaglini 2011). develop a tractable framework to analyze the impact of uncertainty on environmental policy and pollution dynamics.…”