Best policy response to environmental shocks: Applying a stochastic framework

Bretschger, Lucas, and Alexandra Vinogradova. “Best policy response to environmental shocks: Applying a stochastic framework.” Journal of Environmental Economics and Management 97 (2019): 23-41.

The paper develops a general framework for the analysis of environmental shocks in
growing economies. Endogenous capital investments allow identifying the dual role of
capital as a buffer against shocks and a source of pollution. We study the effects of
recurring natural disasters on optimal growth and efficient environmental policies.
Emissions may cause continuous fluctuations, entail discrete and recurring jumps, or
trigger so-called “tipping points” with large costs to the economy. Closed-form solutions
are provided for all the model variants. We discuss possible applications in environmental
economics and identify current research gaps.

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