Optimal investment policies for a polluting firm in an uncertain environment

In this paper a stochastic dynamic model of the firm is used as a framework to study the optimality of abatement investments. Production causes pollution as an inevitable byproduct and in this model the latter is taxed by the government. The firm can diminish these tax payments through reducing its pollution output by carrying out abatement investments. It turns out that, provided that its liquidity position is sufficiently strong, the firm performs a growth policy such that expected marginal revenues of productive and abatement investments are balanced. Growth stops as soon as marginal revenue equals the shareholders' time preference rate. At that time dividend is paid out. We also obtain that the emissions tax rate must exceed a certain lowerbound when the government wants emissions to decrease during the firm's growth phase.