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How capital-based instruments facilitate the transition toward a low-carbon economy : a tradeoff between optimality and acceptability

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Author Info

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

Abstract

This paper compares the temporal profile of efforts to curb greenhouse gas emissions induced by two mitigation strategies: a regulation of all emissions with a carbon price and a regulation of emissions embedded in new capital only, using capital-based instruments such as investment regulation, differentiation of capital costs, or a carbon tax with temporary subsidies on brown capital. A Ramsey model is built with two types of capital: brown capital that produces a negative externality and green capital that does not. Abatement is obtained through structural change (green capital accumulation) and possibly through under-utilization of brown capital. Capital-based instruments and the carbon price lead to the same long-term balanced growth path, but they differ during the transition phase. The carbon price maximizes social welfare but may cause temporary under-utilization of brown capital, hurting the owners of brown capital and the workers who depend on it. Capital-based instruments cause larger intertemporal welfare loss, but they maintain the full utilization of brown capital, smooth efforts over time, and cause lower immediate utility loss. Green industrial policies including such capital-based instruments may thus be used to increase the political acceptability of a carbon price. More generally, the carbon price informs on the policy effect on intertemporal welfare but is not a good indicator to estimate the impact of the policy on instantaneous output, consumption, and utility.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6609.

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Date of creation: 01 Sep 2013
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Handle: RePEc:wbk:wbrwps:6609

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Keywords: Climate Change Mitigation and Green House Gases; Economic Theory&Research; Climate Change Economics; Investment and Investment Climate; Emerging Markets;

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References

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  1. Parry, Ian W.H. & Goulder, Lawrence H., 2008. "Instrument Choice in Environmental Policy," Discussion Papers dp-08-07, Resources For the Future.
  2. Frederick Ploeg & Cees Withagen, 1991. "Pollution control and the Ramsey problem," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 1(2), pages 215-236, June.
  3. Llavador, Humberto & Roemer, John E. & Silvestre, Joaquim, 2011. "“A dynamic analysis of human welfare in a warming planet”," Journal of Public Economics, Elsevier, vol. 95(11), pages 1607-1620.
  4. Céline Guivarch & Stephane Hallegatte, 2011. "Existing Infrastructure and the 2°C Target," Post-Print halshs-00724493, HAL.
  5. Vogt-Schilb, Adrien & Meunier, Guy & Hallegatte, Stephane, 2012. "How inertia and limited potentials affect the timing of sectoral abatements in optimal climate policy," Policy Research Working Paper Series 6154, The World Bank.
  6. Lawrence H. Goulder & Roberton C. Williams, 2012. "The Choice Of Discount Rate For Climate Change Policy Evaluation," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 1250024-1-1.
  7. Laffont, Jean-Jacques & Tirole, Jean, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1089-127, November.
  8. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
  9. Fischer, Carolyn & Newell, Richard, 2004. "Environmental and Technology Policies for Climate Mitigation," Discussion Papers dp-04-05, Resources For the Future.
  10. Jean-Charles Hourcade & Philippe Ambrosi & Stéphane Hallegatte & Franck Lecocq & Patrice Dumas & Minh Ha-Duong, 2003. "Optimal control models and elicitation of attitudes towards climate damages," Post-Print halshs-00000966, HAL.
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Cited by:
  1. Julie Rozenberg & Adrien Vogt-Schilb & Hallegatte Stéphane, 2013. "Efficiency and Acceptability of Climate Policies: Race Against the Lock-ins," Post-Print hal-00916861, HAL.
  2. repec:hal:ciredw:hal-00916328 is not listed on IDEAS
  3. Vogt-Schilb, Adrien & Hallegatte, Stéphane, 2014. "Marginal abatement cost curves and the optimal timing of mitigation measures," Energy Policy, Elsevier, vol. 66(C), pages 645-653.
  4. repec:fae:wpaper:2014.05 is not listed on IDEAS
  5. repec:hal:wpaper:hal-00916328 is not listed on IDEAS

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