Olli Tahvonen

Transboundary air pollution and soil acidification: A dynamic analysis of an acid rain game between Finland and the USSR

Transboundary air pollution is analysed as a dynamic game between Finland and the nearby areas of the Soviet Union. Sulphur emissions are used as the environmental control variables and the acidities of the soils as the state variables. Acidification is consequently considered to be a stock pollutant having long-lasting harmful effects on the environment. The state dynamics consist of two relationships: first, of a sulphur transportation model between the regions and, second, of a model describing how the quality of the soil is affected by sulphur deposition. The countries are assumed to be interested in maximizing the net benefits from pollution control as measured by the impacts on the values of forest growth net of the abatement costs. Cooperative and noncooperative solutions of the game are compared to assess the benefits of bilateral cooperation. Using empirical estimates of abatement costs, acidification dynamics and impacts on forest growth it is shown that cooperation is beneficial to Finland but not to the Soviet Union. Consequently, Finland has to offer monetary compensation to induce her neighbor to invest in environmental protection.

Carbon dioxide abatement as a differential game

The paper combines predictions on greenhouse warming, CO2 abatement costs and adaptation costs in a differential game framework. The analysis incorporates N unequal countries and environmental dynamics with two state variables. The nonautonomous model is solved in closed form. Abatement cost parameters are calibrated with a global energy sector model and climate parameters are based on empirical time series. Simulation suggests that backstop technologies may imply drastic cuts in optimal emission levels. Compared with the Nash noncooperative equilibrium a Pareto optimal agreement is found to be beneficial for developing countries but more costly for the industrial world.

Dynamics of pollution control when damage is sensitive to the rate of pollution accumulation

Economic models which take into account the long-term effects of pollution in the environment specify pollution damage as a function of the accumulated stock. Several economists have proposed another formulation where damage is a function of the time derivative of the pollution stock. This paper considers the intertemporal efficiency implications of this formulation. The first specification is qualitative and the objective functional includes both the rate of change and the level of the pollution stock. The second specification is a stylized climate change model with a linear damage function where damage depends only on the rate of increase in global temperature. The analysis reveals that the efficiency properties of optimal pollution control are very sensitive to this change in the damage function. Intertemporal efficiency may require higher emissions compared with the level which is optimal from the myopic point of view. An increase in the rate of discount typically reduces the optimal emission level.

An Economic Analysis of Transboundary Air Pollution between Finland and the Former Soviet Union

The net benefits of bilateral cooperation between Finland and the former Soviet Union on reducing sulphur emissions are evaluated for both parties. The analysis is based on a sulphur transportation model and on estimated abatement cost functions. It is shown that efficient cooperation may entail financial transfers from Finland to the Soviet Union because it is cheaper to abate sulpher there. It is further demonstrated that a recently signed agreement aimed at reductions in air pollutants is not rational from the Soviet Unions viewpoint and may not, therefore, be carried out without monetary support from Finland. Copyright 1992 by The editors of the Scandinavian Journal of Economics.

Economics of harvesting uneven-aged forest stands in Fennoscandia

This study analyzes the optimal harvesting of uneven-aged Norway spruce (Picea abies (L.) Karst.), Scots pine (Pinus sylvestris L.), and birch (Betula pendula Roth. and B. pubescens Ehrh.) stands. The analysis is based on an economic description of uneven-aged forestry using a size-structured transition matrix model and a single-tree model. The optimization problem is solved in its general dynamic form using gradient-based interior point methods. Increasing the harvesting interval decreases the annual volume yield. Assuming natural regeneration, this suggests that volume yield is maximized by uneven-aged rather than even-aged management. The present value of stumpage revenues is maximized after saw timber and pulpwood prices, interest rate, and a 15-year harvesting interval are included. The economically optimal solution with a 3% interest rate produces an annual yield of 1.9, 6.2, and 3.1 cubic meters for Scots pine, Norway spruce, and birch, respectively. Both the optimal volume yield and net present value maximization solutions converge to unique species- and site-type-specific steady states with constant harvests. The transition matrix model typically used in optimization studies is computationally less demanding than the single-tree model, but the differences in optimal solutions are more remarkable than earlier studies suggest.

Assessing Social – Ecological Trade-Offs to Advance Ecosystem-Based Fisheries Management

Modern resource management faces trade-offs in the provision of various ecosystem goods and services to humanity. For fisheries management to develop into an ecosystem-based approach, the goal is not only to maximize economic profits, but to consider equally important conservation and social equity goals. We introduce such a triple-bottom line approach to the management of multi-species fisheries using the Baltic Sea as a case study. We apply a coupled ecological-economic optimization model to address the actual fisheries management challenge of trading-off the recovery of collapsed cod stocks versus the health of ecologically important forage fish populations. Management strategies based on profit maximization would rebuild the cod stock to high levels but may cause the risk of stock collapse for forage species with low market value, such as Baltic sprat (Fig. 1A). Economically efficient conservation efforts to protect sprat would be borne almost exclusively by the forage fishery as sprat fishing effort and profits would strongly be reduced. Unless compensation is paid, this would challenge equity between fishing sectors (Fig. 1B). Optimizing equity while respecting sprat biomass precautionary levels would reduce potential profits of the overall Baltic fishery, but may offer an acceptable balance between overall profits, species conservation and social equity (Fig. 1C). Our case study shows a practical example of how an ecosystem-based fisheries management will be able to offer society options to solve common conflicts between different resource uses. Adding equity considerations to the traditional trade-off between economy and ecology will greatly enhance credibility and hence compliance to management decisions, a further footstep towards healthy fish stocks and sustainable fisheries in the world ocean.

Economics of Naturally Regenerating, Heterogeneous Forests

An economic model for naturally regenerating, heterogeneous forests is specified to yield both clear-cuts and continuous cover forestry endogenously. The model includes nonconvexities and any number of state variables but is, in its simplest form, a one-state variable problem. Clear-cuts with various rotation lengths and continuous harvesting appear as locally optimal solutions. Necessary and sufficient conditions for the local and global optimality of these two forest management types are obtained. Discounting is found to increase rotation length and to favor continuous harvesting. Initial state may determine the optimality of continuous forest cover versus clear-cuts. The relative value of large trees is an important factor in the optimality of different solutions. Analytical results are demonstrated by an empirical application.

Pollution, Renewable Resources and Irreversibility

The study investigates irreversible pollution damage in the context of renewable resources. It is shown that irreversible pollution damage leads to nonconvexities in dynamic models. There may exist two locally optimal solutions: an optimal infinite horizon solution (sustainable) and an optimal finite horizon solution. In general, the choice between these optimality candidates must be made by comparing the present values of both policies. However, the study shows that there are special cases where the choice can be made on a priori grounds. Including the pollution problem in the renewable resource model changes the ordinary “optimal extinction” results.