Long-run carbon emission implications of energy-intensive infrastructure investments with a retrofit option

Investments in long-lived, fossil-fuel intensive infrastructure can have large effects on carbon emissions over a long future period. We simulate a 2-period model of infrastructure investment with subsequent retrofit to purge its carbon emissions, under uncertainty about climate and retrofit costs. The energy intensity chosen upon investment depends on current and expected future energy and environmental costs, and on future retrofit cost. Simulations of a simplified but realistic model indicate that energy consumption and carbon emissions can be highly excessive when future energy and climate costs are not considered at the time infrastructure investments are made, and charged at globally suboptimal rates when operated; often by more than 50% when energy costs are undervalued at this rate both ex ante and ex post. Good anticipated retrofit options reduce ex post energy costs, but lead to ex ante choice of more energy-intensive infrastructure, which could more than fully offset the energy-reducing effect of the retrofit. These results are of particular importance for emerging economies with large current and anticipated energy-related investments, where long-term climate policy goals may be seriously jeopardized by policy makers facing too low energy prices, now and in the future.