Scandinavian Working Papers in Economics

Working Paper Series,
Swedish University of Agricultural Sciences, Department Economics

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 ()
Additional contact information
Ing-Marie Gren: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden
Martin Lindqvist: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden

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

JEL-codes: D99; O13; Q52; Q53; Q54

32 pages, January 21, 2014

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http://pub.epsilon.slu.se/10981/  

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