In the previous chapter we have seen that, in the absence of coordination, the interactions between individual choices may lead to an unsustainable outcome. The objective of environmental policies is to make agents internalize the effect of their behavior on the environment. Under a Kyoto type of regime, the main motivation for capping greenhouse gas emissions arises from a concern for future generations. The aim is to make sure that the climatic conditions they will experience either will not be worse than ours or, at the very least, will not prevent them from leading a decent life.

In the literature on environmental policy, population is considered as exogenous – not necessarily constant, but exogenous, following, for example, some predetermined path provided by forecast agencies or demographers (see e.g. the projections of Lutz et al. (2001) predicting the end of population growth). It means that there is no feedback from policy to population. This might be a good approximation in the short run, but these studies often deal with horizons of one or two centuries, over which population obviously has time to change. In this chapter, we deal with environmental policies when population is endogenous. We will show that environmental policies that restrict pollution have an unintended consequence of population boost, which in turn lowers the effectiveness of the original policy. Hence, the endogeneity of fertility is important when we deal with environmental policy. In short, pollution quotas act as a tax on production of goods which generate pollution.