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Optimal Investment in Clean Production Capacity

  • Carolyn Fischer


  • Cees Withagen
  • Michael Toman

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

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Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 28 (2004)
Issue (Month): 3 (July)
Pages: 325-345

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Handle: RePEc:kap:enreec:v:28:y:2004:i:3:p:325-345
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  1. Franz Wirl & Cees Withagen, 2000. "Complexities due to sluggish expansion of backstop technologies," Journal of Economics, Springer, vol. 72(2), pages 153-174, June.
  2. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-50, May.
  3. 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.
  4. Toman, Michael & Withagen, Cees, 1998. "Accumulative Pollution, "Clean Technology," and Policy Design," Discussion Papers dp-98-43, Resources For the Future.
  5. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
  6. repec:cup:cbooks:9780521331586 is not listed on IDEAS
  7. Philippe Michel & Gilles Rotillon, 1995. "Disutility of pollution and endogenous growth," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 6(3), pages 279-300, October.
  8. repec:cup:cbooks:9780521337465 is not listed on IDEAS
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