International Emission Strategies under the Threat of a Sudden Jump in the Damages
33 Pages Posted: 7 Mar 2011
Date Written: January 1, 2011
Abstract
We characterize the equilibrium level of emissions, the equilibrium stock of global pollution and the discounted net social welfare for both the cooperative and non-cooperative equilibria when the countries face the risk of a sudden irreversible jump in the global damages at an unknown date. The goal is to analyze the impact of this type of uncertainty on the equilibrium behavior of the countries. We find that uncertainty can have a significant effect on those equilibria. Countries reduce their emissions to mitigate their exposure to risk. As the level of risk rises, countries adjust their emissions to lower the stock of pollutant. However, although initially this type of uncertainty has the effect of lowering the discounted net welfare, it can in the long run have a net positive effect on welfare. The non-cooperative behavior creates a social distortion in terms of environmental quality and in terms of social welfare.
Keywords: Global Pollution, Environmental Uncertainty, Risk, Stock Pollution, Stochastic Differential Games
JEL Classification: C61, C7, D81, Q54
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