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To build or not to build? Capital stocks and climate policy∗

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  • Baldwin, Elizabeth
  • Cai, Yongyang
  • Kuralbayeva, Karlygash

Abstract

We investigate (i) the impact of emission reduction policy on investment in polluting infrastructure, such as coal-fired power stations and (ii) optimal subsidies for “clean” alternatives with “learning” spillovers. We build a general theoretical model, and embed it in a fully calibrated integrated assessment model. Because emission reduction policy reduces investments in polluting assets, short-term emission reductions are enhanced—our “irreversibility effect”. Thus, “stranded assets” in this fuel-using sector have distinctive properties. We also provide a simple formula for how the optimal subsidy to deployment of a “clean” sector depends on its rate of “learning-by-doing” and on its socially-optimal growth. So, if the sector should grow faster for other reasons, its optimal subsidy is increased, showing that its optimal growth rate is faster still—our “acceleration effect”. Our calibrations show that, to limit global climate change to 2○C warming, investments in coal-fired power stations must end very soon. Considering second-best settings, we show that carbon taxes achieve stringent policy targets more efficiently, but subsidies to the “clean” sector deliver higher welfare, and are more efficient, when policy targets are more mild.

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  • Baldwin, Elizabeth & Cai, Yongyang & Kuralbayeva, Karlygash, 2020. "To build or not to build? Capital stocks and climate policy∗," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
  • Handle: RePEc:eee:jeeman:v:100:y:2020:i:c:s0095069617308173
    DOI: 10.1016/j.jeem.2019.05.001
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    3. Michael Grubb & Rutger-Jan Lange & Nicolas Cerkez & Pablo Salas & Jean-Francois Mercure & Ida Sognnaes, 2020. "Taking Time Seriously: Implications for Optimal Climate Policy," Tinbergen Institute Discussion Papers 20-083/VI, Tinbergen Institute.
    4. Francesca Diluiso & Barbara Annicchiarico & Matthias Kalkuhl & Jan C. Minx, 2020. "Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy," CESifo Working Paper Series 8486, CESifo.
    5. Arik Sadeh & Claudia Florina Radu & Cristina Feniser & Andrei Borşa, 2020. "Governmental Intervention and Its Impact on Growth, Economic Development, and Technology in OECD Countries," Sustainability, MDPI, Open Access Journal, vol. 13(1), pages 1-30, December.

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    More about this item

    Keywords

    Infrastructure; Clean and dirty energy inputs; Renewable energy; Stranded assets; Carbon budget; Climate policies; Green paradox;
    All these keywords.

    JEL classification:

    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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