Keywords: greenhouse gases, environmental costs
Chapter 9: Uncertainty, value of information and greenhouse gas emissions
The concentration of greenhouse gases (GHG) in the atmosphere could be perceived as a non-degradable stock pollutant that causes unknown environmental costs. In view of designing commonly agreed (globally negotiated) regulatory strategies against a perceived but, on its scale, unknown threat, the problem is one of preserving regulatory options, and placing values on the preservation of such options before irreversible but uncertain damage can occur. We explore here an optimal regulatory regime in which regulating a non-degradable pollution stock, e.g. the accumulation of greenhouse gases in the atmosphere, would serve two purposes, as found in a more general context of resource economics by Conrad (1992): First, if environmental damage is unexpectedly higher in the future the level of ‘regret’ will be lower. Second, if environmental damage is unexpectedly lower, a low pollution stock today preserves the option of increasing the stock in the future. Such a design relates to problems of optimal stopping. This chapter develops a general formulation of the policy question, which can be conceived as an infinite horizon stochastic dynamic programme with learning (Bertsekas, 1976, Part II). This formulation clarifies the issues, but is mathematically hard to cope with. To provide more explicit guidance, we then take advantage of specific features of this problem to develop a simplified decision framework.