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Optimal Investment in Clean Production Capacity

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  • Carolyn Fischer

    ()

  • Cees Withagen
  • Michael Toman

Abstract

For the mitigation of long-term pollution threats, one must consider that both the process of environmental degradation and the switchover to new and cleaner technologies are dynamic. We develop a model of a uniform good that can be produced by either a polluting technology or a clean one; the latter is more expensive and requires investment in capacity. We derive the socially optimal pollution stock accumulation and creation of nonpolluting production capacity, weighing the tradeoffs among consumption, investment and djustment costs, and environmental damages. We consider the effects of changes in the pollution decay rate, the capacity depreciation rate, and the initial state of the environment on both the steady state and the transition period. The optimal transition path looks quite different with a clean or dirty initial environment. With the former, investment is slow and the price of pollution may overshoot the long-run optimum before converging. With the latter, capacity may overshoot. Copyright Kluwer Academic Publishers 2004

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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 28 (2004)
Issue (Month): 3 (July)
Pages: 325-345

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Handle: RePEc:kap:enreec:v:28:y:2004:i:3:p:325-345

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Web page: http://www.springerlink.com/link.asp?id=100263

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Keywords: capacity investment; clean technology; pollution accumulation;

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References

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  1. Philippe Michel & Gilles Rotillon, 1995. "Disutility of pollution and endogenous growth," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 6(3), pages 279-300, October.
  2. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
  3. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521337465.
  4. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-50, May.
  5. Feichtinger, Gustav & Novak, Andreas & Wirl, Franz, 1994. "Limit cycles in intertemporal adjustment models : Theory and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 353-380, March.
  6. Toman, Michael & Withagen, Cees, 1998. "Accumulative Pollution, "Clean Technology," and Policy Design," Discussion Papers dp-98-43, Resources For the Future.
  7. Franz Wirl & Cees Withagen, 2000. "Complexities due to sluggish expansion of backstop technologies," Journal of Economics, Springer, vol. 72(2), pages 153-174, June.
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Citations

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Cited by:
  1. Chakravorty, Ujjayant & Magne, Bertrand & Moreaux, Michel, 2006. "A Hotelling model with a ceiling on the stock of pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2875-2904, December.
  2. Ben Jebli, Mehdi & Ben Youssef, Slim, 2012. "Timing of adoption of clean technologies, transboundary pollution and international trade," MPRA Paper 42467, University Library of Munich, Germany.
  3. repec:hal:wpaper:hal-00866442 is not listed on IDEAS
  4. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2014. "Transition to clean capital, irreversible investment and stranded assets," Policy Research Working Paper Series 6859, The World Bank.
  5. Ben Youssef, Slim, 2010. "Timing of adoption of clean technologies by regulated monopolies," MPRA Paper 42470, University Library of Munich, Germany, revised Sep 2012.
  6. Goeschl, Timo & Perino, Grischa, 2009. "On backstops and boomerangs: Environmental R&D under technological uncertainty," Energy Economics, Elsevier, vol. 31(5), pages 800-809, September.
  7. repec:hal:ciredw:hal-00850680 is not listed on IDEAS
  8. Benchekroun, Hassan & Ray Chaudhuri, Amrita, 2014. "Transboundary pollution and clean technologies," Resource and Energy Economics, Elsevier, vol. 36(2), pages 601-619.
  9. Oskar Lecuyer & Adrien Vogt-Schilb, 2013. "Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital," Post-Print hal-00850680, HAL.
  10. repec:fae:wpaper:2014.05 is not listed on IDEAS
  11. Bazhanov, Andrei, 2006. "Decreasing of Oil Extraction: Consumption behavior along transition paths," MPRA Paper 469, University Library of Munich, Germany.
  12. repec:hal:wpaper:hal-00850680 is not listed on IDEAS
  13. Chakravorty, Ujjayant & Magné, Bertrand & Moreaux, Michel, 2003. "From Coal to Clean Energy : Hotelling with a Limit on the Stock of Externalities," IDEI Working Papers 229, Institut d'Économie Industrielle (IDEI), Toulouse.

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