Regime Shifts and Uncertainty in Pollution Control
12:00 - 13:00
Authors: Aart de Zeeuw and Amos Zemel
We develop a simple model of managing a system subject to pollution damage, such as climate change, under the risk of an abrupt and random jump in the damage function. The model allows the full dynamic characterization of the optimal emission policies under uncertainty. The results imply precautionary behavior which is in contrast with the ambiguous results reported in the literature on catastrophe models. The framework is used to analyze the adaptation vs. mitigation dilemma and provides a simple criterion to determine when adaptation activities should be undertaken.