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The Transition to Green Technology: Implications of Irreversibility and Noncovexity

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In the ongoing debate over how to mitigate long-term pollution threats (e.g., climate change, accumu- lative water pollutants) and promote long-term sustainable economic development, all sides agree on the importance of developing and disseminating new envi- ronmentally friendly technologies. There is a significant debate over how this is best done, with many economists advocating the use of broad environmental performance standards and economic incentives for environmental protection that will induce technical change, while others advocate a more proactive govern- ment role in inducing the use of green technologies.

For the most part, the conceptual part of this debate has been engaged using fairly simple analytical frameworks that do not encompass a number of important stylized facts, such as: (1) the process of environmental degradation is dynamic, as is the switch- over to new technology; (2) there are uncertainties and irreversibilities surrounding both the accumulation of ecological damages and the costs of new technologies; and (3) both environmental degradation and technical change may exhibit nonconvexities (i.e., threshold effects, multiple ecological equilibria, and lumpy tech- nology transition costs) that complicate the identification of a socially efficient path and the realization of such a path in practice through appropriate policy. In particular, a policy of simply “getting prices right” with respect to environmental damages may not succeed in inducing a socially efficient investment path with non-convexities and irreversibilities.

This project’s objective is to expand understanding of these issues by extending existing dynamic models of production, investment, and pollution accumulation. Of particular interest is the extent to which efficient outcomes are realizable or can be approximated in practice given a limited number of relatively “clumsy” policy tools, which are available in practice (e.g., it is impossible to implement complex dynamically optimal pollution tax paths). The investigator will consider the properties of socially efficient outcomes under conditions of irreversibility and nonconvexity, and the extent to which pollution internalization policies (e.g., emissions permits systems) need to be dovetailed with other policies (e.g., information campaigns, demonstration programs, and subsidies for initial investments in new technology) to overcome sunk cost barriers to the adoption of socially efficient new products and pro- cesses, particularly if there are multiple potential socially efficient outcomes.

In addressing uncertainty and irreversibility, this project will use recent theoretical advances in valuing “technology options” to address how the value of wait- ing versus investing is affected by nonconvexities. This project will contribute to the ongoing debate about what portfolio of policies is best suited to support socially efficient technology transitions in addressing problems such as climate change, accumulative pollutants like methyl bromide and other ozone depletors, and the protection of water bodies from accumulative pollutants, among other cases.

Metadata

EPA/NSF ID:
9613035
Principal Investigators:
Toman, Michael A.
Technical Liaison:
Research Organization:
Resources for the Future
Funding Agency/Program:
NSF/Valuation
Grant Year:
1996
Project Period:
October 1, 1996 to September 30, 1999
Cost to Funding Agency:
$71,250
Project Status Reports:
In 1997:

Description
In the ongoing debate over how to mitigate long-term pollution threats (e.g., climate change, accumulative water pollutants) and promote long-term sustainable economic development, all sides agree on the importance of developing and disseminating new environmentally friendly technologies. There is a significant debate over how this is best done, with many economists advocating the use of broad environmental performance standards and economic incentives for environmental protection that will induce technical change, while others advocate a more proactive government role in inducing the use of green technologies.

For the most part, the conceptual part of this debate has been engaged using fairly simple analytical frameworks that do not encompass a number of important stylized facts, such as: (1) the process of environmental degradation is dynamic, as is the switchover to new technology; (2) there are uncertainties and irreversibilities surrounding both the accumulation of ecological damages and the costs of new technologies; and (3) both environmental degradation and technical change may exhibit nonconvexities (i.e., threshold effects, multiple ecological equilibria, and lumpy technology transition costs) that complicate the identification of a socially efficient path and the realization of such a path in practice through appropriate policy. In particular, a policy of simply "getting prices right" with respect to environmental damages may not succeed in inducing a socially efficient investment path with non- convexities and irreversibilities.

This project's objective is to expand understanding of these issues by extending existing dynamic models of production, investment, and pollution accumulation. Of particular interest is the extent to which efficient outcomes are realizable or can be approximated in practice given a limited number of relatively "clumsy" policy tools, which are available in practice (e.g., it is impossible to implement complex dynamically optimal pollution tax paths). The investigator will consider the properties of socially efficient outcomes under conditions of irreversibility and nonconvexity, and the extent to which pollution internalization policies (e.g., emissions permits systems) need to be dovetailed with other policies (e.g., information campaigns, demonstration programs, and subsidies for initial investments in new technology) to overcome sunk cost barriers to the adoption of socially efficient new products and processes, particularly if there are multiple potential socially efficient outcomes.

In addressing uncertainty and irreversibility, this project will use recent theoretical advances in valuing "technology options" to address how the value of waiting versus investing is affected by nonconvexities. This project will contribute to the ongoing debate about what portfolio of policies is best suited to support socially efficient technology transitions in addressing problems such as climate change, accumulative pollutants like methyl bromide and other ozone depletors, and the protection of water bodies from accumulative pollutants, among other cases.

Project Reports:

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