Scandinavian Working Papers in Economics
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Department Economics, Swedish University of Agricultural Sciences Working Paper Series, Department Economics, Swedish University of Agricultural Sciences

No 2014:1:
Cost-effective management of a eutrophicated sea in the presence of uncertain technological development and climate change

Ing-Marie Gren () and Martin Lindqvist ()

Abstract: We analyse effects of uncertain climate change and technological development on cost-effective abatement of nitrogen and phosphorus for a eutrophied sea. A dynamic model is developed which accounts for differences in the sea’s adjustment to the loads of the two nutrients, uncertainty in climate change effects with probabilistic constraints on nutrient pool targets, and uncertain technological development in a mean-variance framework. The analytical results show that introduction of uncertainty increases abatement costs but that the effect on marginal abatement cost differ for the two types of uncertainty. Marginal abatement cost is increased by technological uncertainty but decreased by the reduction in the risk discount of climate change uncertainties. It is also shown that abatement along the optimal time path is delayed by the introduction of technological uncertainty, but made earlier when considering climate change uncertainty. An application to the eutrophied Baltic Sea indicates that climate change and technological development can reduce total abatement cost by 1/3, but also increase it considerably when uncertainty is included.

Keywords: cost-effectiveness; nutrients; climate change; technological development; uncertainty; Baltic Sea; (follow links to similar papers)

JEL-Codes: D99; O13; Q52; Q53; Q54; (follow links to similar papers)

32 pages, January 21, 2014

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