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Optimal Investment in Clean Production Capacity

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  • Carolyn Fischer

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  • Cees Withagen
  • Michael Toman

Abstract

For the mitigation of long-term pollution threats, one must consider that both the process of environmental degradation and the switchover to new and cleaner technologies are dynamic. We develop a model of a uniform good that can be produced by either a polluting technology or a clean one; the latter is more expensive and requires investment in capacity. We derive the socially optimal pollution stock accumulation and creation of nonpolluting production capacity, weighing the tradeoffs among consumption, investment and djustment costs, and environmental damages. We consider the effects of changes in the pollution decay rate, the capacity depreciation rate, and the initial state of the environment on both the steady state and the transition period. The optimal transition path looks quite different with a clean or dirty initial environment. With the former, investment is slow and the price of pollution may overshoot the long-run optimum before converging. With the latter, capacity may overshoot. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Carolyn Fischer & Cees Withagen & Michael Toman, 2004. "Optimal Investment in Clean Production Capacity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 28(3), pages 325-345, July.
  • Handle: RePEc:kap:enreec:v:28:y:2004:i:3:p:325-345 DOI: 10.1023/B:EARE.0000031057.52949.01
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    References listed on IDEAS

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    1. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
    2. Shmuel S. Oren & Stephen G. Powell, 1985. "Optimal Supply of a Depletable Resource with a Backstop Technology: Heal's Theorem Revisited," Operations Research, INFORMS, vol. 33(2), pages 277-292, April.
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    4. Feichtinger, Gustav & Novak, Andreas & Wirl, Franz, 1994. "Limit cycles in intertemporal adjustment models : Theory and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 353-380, March.
    5. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-650, May.
    6. Philippe Michel & Gilles Rotillon, 1995. "Disutility of pollution and endogenous growth," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 6(3), pages 279-300, October.
    7. Franz Wirl & Cees Withagen, 2000. "Complexities due to sluggish expansion of backstop technologies," Journal of Economics, Springer, vol. 72(2), pages 153-174, June.
    8. Toman, Michael A. & Withagen, Cees, 2000. "Accumulative pollution, "clean technology," and policy design," Resource and Energy Economics, Elsevier, vol. 22(4), pages 367-384, October.
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    Cited by:

    1. Oskar Lecuyer & Adrien Vogt-Schilb, 2013. "Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital," CIRED Working Papers hal-00850680, HAL.
    2. Amigues, Jean-Pierre & Kama, Alain Ayong Le & Moreaux, Michel, 2015. "Equilibrium transitions from non-renewable energy to renewable energy under capacity constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 89-112.
    3. Goeschl, Timo & Perino, Grischa, 2009. "On backstops and boomerangs: Environmental R&D under technological uncertainty," Energy Economics, Elsevier, vol. 31(5), pages 800-809, September.
    4. Ben Jebli, Mehdi & Ben Youssef, Slim, 2014. "Timing of adoption of clean technologies, transboundary pollution and international trade," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-31.
    5. Kollenbach, Gilbert, 2017. "On the optimal accumulation of renewable energy generation capacity," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 157-179.
    6. Chakravorty, Ujjayant & Magne, Bertrand & Moreaux, Michel, 2006. "A Hotelling model with a ceiling on the stock of pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2875-2904, December.
    7. Slim Ben Youssef, 2015. "Timing of Adoption of Clean Technologies by Regulated Monopolies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(1), pages 77-92, March.
    8. repec:hal:wpaper:hal-00850680 is not listed on IDEAS
    9. Goeschl, Timo & Perino, Grischa, 2007. "Innovation without magic bullets: Stock pollution and R&D sequences," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 146-161, September.
    10. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2014. "Transition to clean capital, irreversible investment and stranded assets," Policy Research Working Paper Series 6859, The World Bank.
    11. Bazhanov, Andrei, 2006. "Decreasing of Oil Extraction: Consumption behavior along transition paths," MPRA Paper 469, University Library of Munich, Germany.
    12. Lecuyer, Oskar & Vogt-Schilb, Adrien, 2014. "Optimal transition from coal to gas and renewable power under capacity constraints and adjustment costs," Policy Research Working Paper Series 6985, The World Bank.
    13. Benchekroun, Hassan & Ray Chaudhuri, Amrita, 2014. "Transboundary pollution and clean technologies," Resource and Energy Economics, Elsevier, vol. 36(2), pages 601-619.
    14. repec:hal:wpaper:hal-01057241 is not listed on IDEAS
    15. repec:hal:journl:hal-00850680 is not listed on IDEAS

    More about this item

    Keywords

    capacity investment; clean technology; pollution accumulation;

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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