Fundamental irreversibilities in stock externalities

This paper concerns the irreversibility effect in stock externalities. In an environment of uncertainty with learning taking place, one may wish to under-emit today to avoid potential environmental irreversibilities. Alternatively, one may wish to under-invest in pollution control capital, avoiding investments in sunk capital that turn out to be wasted. The paper develops theoretical results on the tension between these two effects and separates risk aversion from the irreversibility effect. The paper also presents a simple example in climate change policy.