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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. Humberto Llavador & John E. Roemer & Joaquim Silvestre, 2008. "A Dynamic Analysis of Human Welfare in a Warming Planet," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1673, Cowles Foundation for Research in Economics, Yale University.
  2. Fischer, Carolyn & Newell, Richard, 2004. "Environmental and Technology Policies for Climate Mitigation," Discussion Papers, Resources For the Future dp-04-05, Resources For the Future.
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  4. Guy MEUNIER, 2013. "How inertia and limited potentials affect the timing of sectoral abatements in optimal climate policy," Working Papers, Institut National de la Recherche Agronomique, France 221662, Institut National de la Recherche Agronomique, France.
  5. Lawrence H. Goulder & Ian W. H. Parry, 2008. "Instrument Choice in Environmental Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(2), pages 152-174, Summer.
  6. Céline Guivarch & Stéphane Hallegatte, 2011. "Existing infrastructure and the 2°C target," Climatic Change, Springer, Springer, vol. 109(3), pages 801-805, December.
  7. 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.
  8. 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, HAL halshs-00000966, HAL.
  9. Lawrence H. Goulder & Roberton C. Williams III, 2012. "The Choice of Discount Rate for Climate Change Policy Evaluation," NBER Working Papers 18301, National Bureau of Economic Research, Inc.
  10. Ploeg, F. van der & Withagen, C.A.A.M., 1991. "Pollution control and the Ramsey problem," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-3107039, Tilburg University.
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Cited by:
  1. Julie Rozenberg & Adrien Vogt-Schilb & Stephane Hallegatte, 2013. "Efficiency and Acceptability of Climate Policies: Race Against the Lock-ins," Review of Environment, Energy and Economics - Re3, Fondazione Eni Enrico Mattei, Fondazione Eni Enrico Mattei, November.
  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. repec:hal:ciredw:hal-00916328 is not listed on IDEAS
  4. Adrien Vogt-Schilb & Stéphane Hallegatte, 2014. "Marginal abatement cost curves and the optimal timing of mitigation measures," Post-Print, HAL hal-00916328, HAL.
  5. repec:hal:wpaper:hal-00916328 is not listed on IDEAS

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