Essays on Environmental and Computational Economics

Abstract

The study consists of three separate essays. The first essay reassesses and extends the papers by Pindyck (2000, 2002) which analyze the effects of uncertainty and irreversibility on the timing of emissions reduction policy. It is shown that proposed solutions for some of the optimal stopping problems introduced in these papers are incorrect. Correct solutions are provided for both the incorrect special cases and the general model through a numerical method since closed form solutions do not exist for these problems. In the second essay, singular control framework is employed in order to allow for gradual emission reduction instead of once-for-all type policies. The solution for the model is obtained using the numerical method introduced in the last essay. The effects of uncertainty and irreversibility on optimal emission reduction policy are investigated. The model is illustrated for greenhouse gas mitigation in the context of climate change problem and some of the model parameters are estimated using a state space model. In the third essay, a unified numerical method is introduced for solving multidimensional singular and impulse control models. The link between regime switching and singular/impulse control problems is established. This link results in a convenient representation of optimality conditions for the numerical method. After solving the optimality conditions at a discrete set of points, an approximate solution can be obtained by solving an extended vertical linear complementarity problem using a variety of techniques. The numerical approach is illustrated with four examples from economics and finance literature.