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Capital beats coal: How collecting the climate rent increases aggregate investment

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  • Siegmeier, Jan
  • Mattauch, Linus
  • Edenhofer, Ottmar

Abstract

Carbon pricing is the key to decarbonizing the economy, as it regulates emission flows. However, a price on carbon also collects rents from underlying fossil resource stocks, giving rise to unexamined macroeconomic effects. This article shows that if these stocks are tradable, carbon pricing shifts aggregate investment towards alternative assets. If capital is underaccumulated, this implies lower costs of climate policy and a welfare improvement. We prove this beneficial investment shift from fossil stocks towards capital for the case of an emission trading scheme: specifically, we show that the higher the share of auctioned permits, the larger the beneficial investment effect. The same holds for a ‘stock instrument’, under which the right to recurrently receive emission permits is a tradable asset, making the effect robust to trade restrictions on fossil stocks. Our main result contradicts the common perception of a trade-off between climate change mitigation policy and growth.

Suggested Citation

  • Siegmeier, Jan & Mattauch, Linus & Edenhofer, Ottmar, 2018. "Capital beats coal: How collecting the climate rent increases aggregate investment," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 366-378.
    • Handle: RePEc:eee:jeeman:v:88:y:2018:i:c:p:366-378
    DOI: 10.1016/j.jeem.2017.12.006
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    3. Matteo Mazzarano, 2024. "Financial markets implications of the energy transition: carbon content of energy use in listed companies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-20, December.

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    More about this item

    Keywords

    Carbon pricing; Resource rent taxation; Overlapping generations; Capital underaccumulation;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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