Modeling of Environmental Adaptation versus Pollution Mitigation

¹ School of Business, Houston Baptist University, 7502 Fondren, Houston, Texas 77074, USA
² Department of Mathematics, Prairie View A&M University, Prairie View, Texas 77446, USA
³ Université catholique de Louvain, CORE and Louvain School of Management, Belgium

^⋆ Corresponding author. E-mail: yyatsenko@hbu.edu

Abstract

The paper combines analytic and numeric tools to investigate a nonlinear optimal control problem relevant to the economics of climate change. The problem describes optimal investments into pollution mitigation and environmental adaptation at a macroeconomic level. The steady-state analysis of this problem focuses on the optimal ratio between adaptation and mitigation. In particular, we analytically prove that the long-term investments into adaptation are profitable only for economies above certain efficiency threshold. Numerical simulation is provided to estimate how the economic efficiency and capital deterioration affect the optimal policy.