The control of polluting emissions is an perpetual question in the literature of environmental economics. Different economic settings require different tools and strategies to efficiently keep pollution under control. Stefan Wrzaczek together with international colleagues analyses these strategies within two different settings: (i) Management of the tragedy of commons and polluting emissions through taxation in different market settings. (ii) Pollution control under catastrophic climate change as a differential game.

Managing the tragedy of commons and polluting emissions

Containing CO2 emitting production is one of the main goals of climate policy. We address the issue of regulating both polluting emissions through incentive mechanisms like firm and consumer taxation and managing access to a common resource pool in a dynamic oligopoly market game scenario. Our analysis shows that for a Cournot market structure, a regulation of the industry in order to induce the industry to harvest the resource in correspondence of the maximum sustainable yield, social welfare is either independent or decreasing in the tax if firms do not invest in abatement technologies. Meanwhile, if they do, the policy maker may increase the tax to foster both individual and aggregate green research and development to attain abatement technologies, ideally up to the level at which emissions and the associated environmental damage are nil. This also allows us to detect the arising of the win-win solution associated to the strong form of the Porter hypothesis. We extend the analysis to encompass product differentiation and monopolistic competition, to show that qualitatively analogous conclusions obtain.

In current work Wrzaczek and colleagues are extending the results to a Bertrand market, a model setup including an endogenous demand side (formed by OLG structured individuals), and risks for a catastrophic climate change (climate tipping point).

Feichtinger, G., Lambertini, L., Leitmann, G., & Wrzaczek, S. (2022). Managing the tragedy of commons and polluting emissions: a unified view. European Journal of Operational Research 303 (1) 487-499. 10.1016/j.ejor.2022.02.034.

An OLG Differential Game of Pollution Control with the Risk of a Catastrophic Climate Change

This paper studies an overlapping generations (OLG) differential game on optimal emissions with continuous age structure and different types of individuals. At the (stochastic) arrival of a catastrophic climate change, the utility and the damage to the stock of pollution change for the rest of the time horizon. We derive the open-loop (OL) Nash equilibrium and show that it is subgame perfect and moreover equal to the feedback Stackelberg one. We compare the solution to the cooperative one (using the social welfare as objective function) and show the different dynamic evolutions of optimal emissions over time. Finally, we derive a time-consistent tax scheme that reaches the cooperative optimal solution in the OL Nash equilibrium. The tax scheme turns out to be heterogeneous with respect to age and type (anticipating and nonanticipating the catastrophic climate change). Setting taxes that are homogeneous across the individual type leads to an OL Nash solution that produces socially optimal total emissions, but lower individual utilities.