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Shifting to a Green Economy: Lock-in, Path Dependence, and Policy Options

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  • Kemp-Benedict, Eric

Abstract

In the face of increasingly likely dangerous climate change, many developing countries are designing green economy or low-emissions development strategies, but are simultaneously on a course of investment locking them into high-emission infrastructure. Meanwhile, many high-income countries are working to reduce their emissions but are hampered by the cost of switching from an existing capital stock designed for a fossil fuel-based economy. This paper looks at economic aspects of the challenge of escaping carbon lock-in using a “brown-green capital” model. In the model, brown capital is more productive than green capital in a brown capital-dominated economy, while green capital is more productive in a green capital-dominated economy; that is, the model allows for “carbon lock-out”. We explore possible macroeconomic consequences of policies to drive a transition to a low-carbon economy and policy responses in the case that macroeconomic imbalances result. Three results are particularly interesting. First, the effect of policy instruments depends on whether the economy is wage-led or profitled, a distinction that emerges from post-Keynesian theory. Second, if investors hedge against uncertainty over expected levels of green and brown investment, then there is likely to be underinvestment in green capital even at quite high levels of green capital penetration, creating a substantial challenge for policymakers. Third, the model suggests an unusual role for a carbon price, to control inflationary pressure arising from public green capital investment, in addition to its usual role of encouraging emissions reductions at the margin.

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  • Kemp-Benedict, Eric, 2014. "Shifting to a Green Economy: Lock-in, Path Dependence, and Policy Options," MPRA Paper 60175, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:60175
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    More about this item

    Keywords

    green economy; brown-green capital; carbon lock-in; post-Keynesian; Kaleckian;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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