Reversible Environmental Catastrophes with Disconnected Generations
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Reversible Environmental Catastrophes with Disconnected Generations Ben J. Heijdra1,2,3 · Pim Heijnen1 Accepted: 27 October 2020 © The Author(s) 2020
Abstract We study environmental policy in a stylized economy–ecology model featuring multiple deterministic stable steady-state ecological equilibria. The economy–ecology does not settle in either of the deterministic steady states as the environmental system is hit by random shocks. Individuals live for two periods and derive utility from the (stochastic) quality of the environment. They feature warm-glow preferences and engage in private abatement in order to weakly influence the stochastic process governing environmental quality. The government may also conduct abatement activities or introduce environmental taxes. We solve for the market equilibrium abstracting from public abatement and taxes and show that the ecological process may get stuck for extended periods of time fluctuating around the heavily polluted (low quality) deterministic steady state. These epochs are called environmental catastrophes. They are not irreversible, however, as the system typically switches back to the basin of attraction associated with the good (high quality) deterministic steady state. The paper also compares the stationary distributions for environmental quality and individuals’ welfare arising under the unmanaged economy and in the first-best social optimum. Keywords Ecological thresholds · Nonlinear dynamics · Environmental policy · Abatement · Capital taxes JEL Classification D60 · E62 · H23 · H63 · Q20 · Q28 · Q50
This paper was presented at the 14th Viennese Conference on Optimal Control and Dynamic Games 2018 (3–6 July 2018) and at the CeNDEF@20 workshop (Amsterdam, 18–19 October 2018). Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1064 5-020-09378-7) contains supplementary material, which is available to authorized users. * Ben J. Heijdra [email protected] Extended author information available on the last page of the article
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1 Introduction “The window within which we may limit global temperature increases to 2 ◦ C above preindustrial times is still open, but is closing rapidly. Urgent and strong action in the next two decades [...] is necessary if the risks of dangerous climate change are to be radically reduced.” Nicholas Stern, Why Are We Waiting? (2015, p. 32) “ ...we are entering the Climate Casino. By this, I mean that economic growth is producing unintended but perilous changes in the climate and earth systems [which] will lead to unforeseeable and probably dangerous consequences. We are rolling the climatic dice, the outcome will produce surprises, and some of them are likely to be perilous. But we have just entered the Climate casino, and there is still time to turn around and walk back out.” William Nordhaus, The Climate Casino (2013, pp. 3-4) “...I am a climate lukewarmer. That means I think recent global warming is real, mostly man-made and will contin
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