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Instrument choice and stranded assets in the transition to clean capital

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  • Rozenberg, Julie
  • Vogt-Schilb, Adrien
  • Hallegatte, Stephane

Abstract

This paper compares the impact of different climate mitigation policies — mandates, feebates, performance standards, and carbon pricing — in a Ramsey model with clean and polluting capital, irreversible investment, and a climate constraint. These policy instruments imply different transitions to the same balanced growth path. The optimal carbon price minimizes the discounted social cost of the transition to clean capital, but may prompt premature retirement of existing polluting capacities and significant private costs in the form of stranded assets. Second-best mandates and feebates affect new investment decisions without providing incentives to under-use existing polluting equipment. These instruments lead to higher discounted social costs, but smoother abatement costs, and do not result in premature retirement or stranded assets. A phased-in carbon price can avoid premature retirement but still result in stranded assets, that is in a drop of wealth for the owners of polluting capital. We discuss a potential trade-off between the political feasibility and cost-effectiveness of climate mitigation policies.

Suggested Citation

  • Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2020. "Instrument choice and stranded assets in the transition to clean capital," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:jeeman:v:100:y:2020:i:c:s009506961730623x
    DOI: 10.1016/j.jeem.2018.10.005
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    Keywords

    Political economy; Public acceptability; Policy instrument; Climate change; Intergenerational equity;
    All these keywords.

    JEL classification:

    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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