The Effects of Political Short-Termism on Transitions Induced by Pollution Regulations

Abstract

We study the dynamic problem of pollution control enacted by some policy of regulation and mitigation. The dynamics of the transition from one level of regulation and mitigation to another usually involves inter-temporal trade-offs. We focus on how different policymaker's time horizons affect these trade-offs. We refer to shorter lengths in policymaker's time horizons as political short-termism or inattention, which is associated with political economy or information constraints. Formally, inattention is modeled by using Nonlinear Model Predictive Control. Therefore, it is a dynamic concept: our policymakers solve an inter-temporal decision problem with finite horizon that involves the repetitive solution of an optimal control problem at each sampling instant in a receding horizon fashion. We find that political shorttermism substantially affects the transition dynamics. It leads to quicker, but costlier, transitions. It also leads to an under-evaluation of the environmental costs that may accelerate climate change. * The authors are grateful for comments from Bas van Aarle, Marco Di Pietro, Francesco Forte, Behnaz Minooei Fard, and Joseph Plasmans. They also authors acknowledge financial support by Sapienza University of Rome. An earlier version of this paper has been circulated under the title "Inattention, and pollution regulation policies." 1 See Spengler and Sexton (1983) and Gallegati et al. (2017) for the nexus of economic growth, C02 emission and global temperature rise. For the nexus of CO2 emission, climate disasters and adaptation policies, see Mittnik et al. (2018). 2 Orlov et al. (2018 show that indeed the agents in the short run, the current generation, might face some welfare losses, as compared to business-as usual, but in the long run, for future generations, there can also be some gains, since increases in temperature and damages are avoided.

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