Growth and irreversible pollution: Are emission permits a means of avoiding environmental and poverty traps?

Abstract

We consider an OLG model with emissions arising from production and potentially irreversible pollution. Pollution control consists of the assignment of permits to firms; private agents also can abate pollution. In this setting, we prove that multiple equilibria exist. Due to the possible irreversibility of pollution, the economy can be dragged into both environmental and poverty traps. First, we show that choosing an emission quota at the lowest level beyond a critical threshold is a means to avoid these two types of traps. We also prove that when the agents do not engage in maintenance, a reduction of the quota leads to a reduction in pollution but also to slower capital accumulation. In contrast, when agents do engage in maintenance, a reduction of the quota provides a double dividend. © 2011 Cambridge University Press.