Abatement Capital Accumulation and the Shadow Price of Carbon

Using a theoretical model calibrated for France with a cost-efficiency approach, we study the consequences for the shadow price of carbon when accounting for abatement capital accumulation. We find that the shadow price of the abatement capacity exhibits a non-monotonic path, which differs from the classical Hotelling rule that is followed by the carbon price. However, even if the growth rate of the latter only depends on the discount rate -and the hazard rate when the target is uncertain, its initial value is affected by the characteristics of the investment technology. We also investigate the dynamics of the investment in abatement after the carbon budget is reached. In the numerical application, we find that the optimal date of carbon neutrality lies between 2045 and 2053. Finally we show that decoupling technologies would be largely less costly than clean-up technologies, in particular once the carbon budget is met.