The Effects of Irreversibilities on the Optimal Timing of Pollution Control Policies

We construct a real option model in which government determines the timing of investment in pollution control and examine how irreversibilities affect the optimal investment decisions. Investment is assumed to be completely irreversible and its benefit (a value of damage parameter) is uncertain. Irreversibility of emissions is also considered. By comparing the optimal policies for various cases, we get the following results. Irreversibility of investment delays the optimal timing of policy implementation and this effect gets stronger as the degree of uncertainty increases. Irreversibility of emissions works for the opposite direction, but it does not depend on the degree of uncertainty