Abstract

This dissertation comprises two essays that study normative environmental policy and the purported side effects of (already enacted) environmental policies. In the first essay, we analyze the management of a stock pollutant in a simplified economy using optimal control. The level of stock pollutant affects utility negatively and it may trigger a catastrophic event when it hits a predetermined threshold, which results in a sudden drop in utility. A numerical illustration for the case of global climate change shows that decision maker can delay the onset of a catastrophe by increasing abatement (by investing into green capital); and by improving the environmental performance of production technology. This delaying effect can be amplified by using both policy instruments in tandem. We also observe that the time to catastrophe slightly increases with a decrease in discounting factor; an increase in the amount of catastrophic damage and a decrease in post-catastrophe capital prices. The time period from 1979 to 2003 saw the emergence of Corporate Average Fuel Economy (CAFE) standards, fluctuating and then stabilizing gasoline prices, and an increased share of light trucks. In the second essay, we analyze the alleged causality of this increased share by the introduction of fuel economy standards. We estimate the market demand for fuel economy of domestic cars and light trucks using a polynomial lag model. The main result of this essay is that the rising share of light trucks in the new domestic vehicle sales can be attributed to the increase in personal incomes during the 25 years considered, aided by the provision of laxer fuel economy standards for light trucks. Moreover, the fuel economy standards did increase the fuel efficiency of domestic vehicles.