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

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  • Elizabeth Baldwin, Yongyang Cai, Karlygash Kuralbayeva

Abstract

We investigate how irreversibility in “dirty” and “clean” capital stocks affects optimal climate policy, from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our “irreversibility effect”. As such the “Green Paradox” has a converse if we focus on demand side capital stock effects. We also show that the optimal subsidy increases with the deployment rate: our “acceleration effect”. Considering second-best settings, we show that, although carbon taxes achieve stringent targets more efficiently, in fact renewable subsidies deliver higher welfare when policy is more mild.

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  • Elizabeth Baldwin, Yongyang Cai, Karlygash Kuralbayeva, 2018. "To build or not to build? Capital stocks and climate policy," GRI Working Papers 290, Grantham Research Institute on Climate Change and the Environment.
  • Handle: RePEc:lsg:lsgwps:wp290
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    8. Wei Jin & ZhongXiang Zhang, 2018. "Capital Accumulation, Green Paradox, and Stranded Assets: An Endogenous Growth Perspective," Working Papers 2018.33, Fondazione Eni Enrico Mattei.
    9. Jeroen C.J.M. van den Bergh & Arild Angelsen & Andrea Baranzini & W.J. Wouter Botzen & Stefano Carattini & Stefan Drews & Tessa Dunlop & Eric Galbraith & Elisabeth Gsottbauer & Richard B. Howarth & Em, 2018. "Parallel tracks towards a global treaty on carbon pricing," Working Papers 2018/12, Institut d'Economia de Barcelona (IEB).
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    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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