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Optimal Investment in Clean Production Capacity

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  • Fischer, Carolyn

    ()
    (Resources for the Future)

  • Toman, Michael
  • Withagen, Cees

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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Bibliographic Info

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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Keywords: pollution accumulation; clean technology; capacity investment;

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References

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  1. Toman, Michael A. & Withagen, Cees, 2000. "Accumulative pollution, "clean technology," and policy design," Resource and Energy Economics, Elsevier, vol. 22(4), pages 367-384, October.
  2. 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.
  3. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(442), pages 636-50, May.
  4. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521337465, 9.
  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.
  6. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
  7. 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.
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Citations

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Cited by:
  1. Ben Youssef, Slim, 2010. "Timing of adoption of clean technologies by regulated monopolies," MPRA Paper 42470, University Library of Munich, Germany, revised Sep 2012.
  2. Oskar Lecuyer & Adrien Vogt-Schilb, 2014. "Assessing and Ordering Investment in Polluting Fossil-fueled and Zero-carbon Capital," Working Papers 2014.05, FAERE - French Association of Environmental and Resource Economists, revised May 2014.
  3. Chakravorty, Ujjayant & Magné, 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.
  4. Ben Jebli, Mehdi & Ben Youssef, Slim, 2013. "Timing of adoption of clean technologies, transboundary pollution and international trade," Economics Discussion Papers 2013-50, Kiel Institute for the World Economy.
  5. Oskar Lecuyer & Adrien Vogt-Schilb, 2014. "Optimal Transition from Coal to Gas and Renewable Power under Capacity Constraints and Adjustment Costs," Post-Print hal-01057241, HAL.
  6. repec:hal:wpaper:hal-00866442 is not listed on IDEAS
  7. 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.
  8. 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.
  9. Lecuyer, Oskar & Vogt-Schilb, Adrien, 2014. "Optimal transition from coal to gas and renewable power under capacity constraints and adjustment costs," Policy Research Working Paper Series 6985, The World Bank.
  10. repec:hal:ciredw:hal-00850680 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. Benchekroun, Hassan & Ray Chaudhuri, Amrita, 2014. "Transboundary pollution and clean technologies," Resource and Energy Economics, Elsevier, vol. 36(2), pages 601-619.
  13. repec:hal:wpaper:hal-00850680 is not listed on IDEAS
  14. 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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