The consequences of irreversibility on optimal intertemporal emission policies under uncertainty

This paper investigates how irreversibility affects optimal intertemporal emission policies when negative stock externalities exist. In particular it discusses the effect of irreversible emission, i.e., it concerns the physical issue whether it is possible to recollect pollutants that have been emitted or not. We depict our analysis with the greenhouse effect as a topical example and model the uncertainty with respect to the future evolution of the world’s temperature (i.e., the uncertain factor that determines the costs) as Itô-process with the drift provided by current carbon-dioxide emissions. We show analytically that irreversibility affects the optimal emission policy only if the future impact of today’s emissions is uncertain. Under uncertainty, irreversibility leads to a conservationist policy such that emissions are reduced at any level of environmental concentration of the pollutant. The level where stopping emissions is optimal decreases in the presence of irreversibility. Furthermore, the expected duration of fossil fuel use is derived. A numerical example which is calibrated to roughly reflect the global CO 2 problem illustrates the analytical findings. Copyright Springer-Verlag 2007