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Transition to clean capital, irreversible investment and stranded assets

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

Abstract

This paper uses a Ramsey model with two types of capital to analyze the optimal transition to clean capital when polluting investment is irreversible. The cost of climate mitigation decomposes as a technical cost of using clean instead of polluting capital and a transition cost from the irreversibility of pre-existing polluting capital. With a carbon price, the transition cost can be limited by underutilizing polluting capital, at the expense of a loss in the value of polluting assets (stranded assets) and a drop in income. In contrast, policy instruments that focus on redirecting investments -- such as feebates or environmental standards -- prevent underutilization of existing capital, avoid stranded assets, and reduce short-term losses; but they reduce emissions more slowly and increase the intertemporal cost of the transition. The paper investigates inter- and intra-generational distributional impacts and the political acceptability of climate change mitigation policy instruments.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6859.

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Date of creation: 01 May 2014
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Handle: RePEc:wbk:wbrwps:6859

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

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References

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