When, and how, to be precautious
12:00 - 13:00
The precautionary principle (PP) applied to environmental policy stipulates that, in the presence of physical uncertainty, society must take take robust preventive action to guard against worst-case outcomes. It follows that the higher the degree of uncertainty, the more aggressive this preventive action should be. This normative maxim is tested in the case of a simple dynamic model of pollution control under Knightian uncertainty, in which a benevolent government chooses a level of adaptation technology investment at time 0, and subsequently decides on a desirable dynamic emissions policy. Adopting the robust control framework of Hansen and Sargent (AER 2001), we investigate optimal adaptation and mitigation policies. We show that optimal investment in adaptation technology is always increasing in the degree of uncertainty, thus confirming the conventional PP wisdom. Optimal mitigation decisions, however, need not always comport with the PP and we provide analytical conditions that sway the relationship one way or the other. This result is interesting when contrasted to a model without the possibility for adaptation investment, in which it can be easily shown that the PP unambiguously holds. We conduct a set of numerical experiments to determine the sensitivity of our results to specific functional forms of adaptation cost. We find that when the cost of adaptation technology is low enough, the PP can be unambiguously irrational.