Marc Baudry

Joint Management of Emission Abatement and Technological Innovation for Stock Externalities

We investigate how emission abatement and technological innovation provide different solutions to reduce pollutant emissions. In the case of a stock externality emission abatement leads to a smooth and continuous adjustment of emissions. Conversely, technological innovation has to be interpreted as an option on a less polluted environment and can justify the use of a pollution threshold above which it is optimal to start a research and development programme for a less polluting technology. It is shown that technological innovation interferes with the traditional emission abatement approach. The optimal abatement level is logically lowered once the less polluting technology is available; nevertheless a temporary increase in emissions is optimal during the research and development period. The usual Pigouvian tax system proves to remain an efficient corrective instrument. A numerical application to the Greenhouse effect is provided.

Stock externalities and the diffusion of less polluting capital: an option approach

Abstract In this paper, the diffusion of less polluting capital in response to a stock externality is investigated. An economy is considered with identical polluted agents and a continuum of polluters who have the ability to invest in less polluting capital units. The option approach of investment decisions is used to justify environmental policies based on pollution thresholds and emission standards. The dynamics of optimal diffusion is first examined. The design of a suitable emission tax is then considered and some cases of tax inefficiency are detailed in the context of a game between symmetric polluters. The model is finally applied to greenhouse gas accumulation.

Le modèle de préservation de l'environnement de ARROW et FISHER : une approche en terme d'options réelles

The Arrow and Fisher [1974] model of environmental preservation with irreversibility and uncertainty is reconsidered in the perspective of the real option theory. Thanks to this approach, an extension of the model to the continuous time case with a partial exploitation of non renewable resources and a direct computation of the optimal preservation threshold are possible. The concepts of quasi-option value and irreversibility effect, initially aimed at comparing the certainty case with the uncertainty case, are restated and extended to the comparison of situations characterised by different degrees of uncertainty.

Un modèle canonique d'option réelle bayesienne et son application au principe de précaution

Uncertainty on effective stocks or damages is the core of most irreversible economic decisions involving natural resources and the environment and, more generally, of most investment decisions. The discussion on the relevance of the precautionary principle is illustrative of this role. Although there is an extensive literature dealing with the theoretical aspects of this problem, economists still lack an operational decision rule. The matter is that the real option theory, now widely used to deal with markovian uncertainty, i.e. independent exogenous repeated chocks affecting the expected return from an irreversible project as time goes, is not adequate to analyze problems characterized by Bayesian uncertainty, i.e. problems where uncertainty about the effective value of parameters is resolved with time by a learning process based on the acquisition of information in the form of quantitative as well as qualitative signals. This paper is aimed at remedying at these shortcomings. The real option theory is adapted to an explicit Bayesian learning process in continuous time. Application to Genetically Modified Organisms farming is used as an illustrative example.