Consequences of irreversibilities on optimal intertemporal CO2 emission policies under uncertainty

This paper investigates how irreversiblities affect the optimal intertemporal accumulation of greenhouse gases in the atmosphere under uncertainty. More precisely, the evolution of the future temperature is assumed to follow an Ito-process with the drift provided by greenhouse gas emissions. This paper considers two different kinds of irreversibilities: of emissions (i.e., CO2 once dissolved into the air cannot be collected later) and of stopping. These issues are investigated first (in the tradition of the real option literature) as pure stopping problems and then allowing for a continuous choice of emissions. Implications for global warming are: an irreversible stopping of greenhouse gas emissions is never optimal in a continuous framework and yields in the real option framework a less conservationist stopping rule in which uncertainty increases the stopping threshold (i.e. works against conservation). (c) 2005 Elsevier B.V. All rights reserved.