On the implication of environmental policy on growth in an OLG model with pollution permits and potential irreversible pollution

We consider an OLG model with emissions arising from production and potential irreversible pollution. Pollution control goes through a system of permits and private agents can also maintain the environment. In this setting, we prove that there exist multiple equilibria. Due to the possible irreversibility, the economy can be dragged into both stationary and asymptotic poverty traps. First, we show that choosing a global quota on emissions at the lowest level beyond a critical threshold is a mean to avoid the two types of traps. Next, we analyze the impact of a political reform on the other equilibria. When the agents do not engage in maintenance, a fall in the quota implies a reduction of pollution but is detrimental to capital accumulation while, in the other case, it procures a double dividend