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Optimal Investment in Clean Production Capacity

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Author Info
Fischer, Carolyn () (Resources for the Future)
Toman, Michael
Withagen, Cees

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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 adjustment 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 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.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-02-38.

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Date of creation: 01 Jul 2002
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Handle: RePEc:rff:dpaper:dp-02-38

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Related research
Keywords: pollution accumulation; clean technology; capacity investment;

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Find related papers by JEL classification:
Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May. [Downloadable!] (restricted)
  2. Narain, Urvashi & Fisher, Anthony C., 1999. "Irreversibility, uncertainty, and global warming : a theoretical analysis," CUDARE Working Paper Series 843, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised 1999.
  3. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-50, May. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Franz Wirl & Cees Withagen, 2000. "Complexities due to sluggish expansion of backstop technologies," Journal of Economics, Springer, vol. 72(2), pages 153-174, June. [Downloadable!] (restricted)
  6. Toman, Michael & Withagen, Cees, 1998. "Accumulative Pollution, "Clean Technology," and Policy Design," Discussion Papers dp-98-43, Resources For the Future. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chakravorty, Ujjayant & Magne, 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. [Downloadable!]
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  2. Timo Goeschl & Grischa Perino, 2007. "On Backstops and Boomerangs: Environmental R&D under Technological Uncertainty," Working Papers 0437, University of Heidelberg, Department of Economics, revised Jan 2007. [Downloadable!]
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  3. Chakravorty, Ujjayant & Magne, Bertrand & Moreaux, Michel, 2005. "A Hotelling Model with a Ceiling on the Stock of Pollution," IDEI Working Papers 368, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  4. Bazhanov, Andrei, 2006. "Decreasing of Oil Extraction: Consumption behavior along transition paths," MPRA Paper 469, University Library of Munich, Germany. [Downloadable!]
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