0Intertemporal Expansion of Backstop Capacities

This paper considers an economy using a product that adds to a stock of pollution (e.g., SO2 emissions from burning coal accumulate in the soil, CO2 missions from fossil energy use are retained in the atmosphere), which is also subject to natural decay (albeit not necessarily of the simple often assumed linear type). In addition, a clean or so-called backstop technology is available that requires costly investments but is characterised by low variable costs (e.g., solar energy or wind power). These costly investments lead to a slow build-up of the capacity of the backstop. On the modelling side, this is an essential extension of most of the literature that considers the unrealistic case that a backstop is instantaneously available. The second extension the present paper makes is to consider not only the planning problem but also competitive outcomes. One of the interesting results is that stable limit cycles may characterise the socially optimal long run outcome as well as the competitive equilibrium. Although cycling can be compatible with a socially optimal pollution policy, relaxing the control, as might implicitly be the case in the competitive equilibrium, increases the possibilities of complex and unstable behaviour