Pollution control: targets and dynamics.

In this paper I study the e¤ects of environmental regulation which establishes upper and lower binding targets to pollution emissions. Essentially, I deal with the properties of a stochastic model of pollution control in continuous-time under emission targets and uncertainty, emphasizing dynamic nonlinearities. Inside the targets pollution behaves as if it were freely floating until it hits one of the two limits. The model provides three main results. First, I show that binding targets can affect the pollution floating even when the boundaries are currently slack. Solutions of the model show that pollution becomes an S-shaped locus of the fundamentals. Second, I show that binding targets will lead to more stable pollution rate determination within the boundaries, than free floating. Finally, stabilization of pollution is related to the growth rate and volatility of fundamentals, to the sensitivity to expected changes of pollution rate and to the credibility of the authorities in defending the pollution targets.