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How inertia and limited potentials affect the timing of sectoral abatements in optimal climate policy

  • Vogt-Schilb, Adrien
  • Meunier, Guy
  • Hallegatte, Stephane

This paper investigates the optimal timing of greenhouse gas abatement efforts in a multi-sectoral model with economic inertia, each sector having a limited abatement potential. It defines economic inertia as the conjunction of technical inertia -- a social planner chooses investment on persistent abating activities, as opposed to choosing abatement at each time period independently -- and increasing marginal investment costs in abating activities. It shows that in the presence of economic inertia, optimal abatement efforts (in dollars per ton) are bell-shaped and trigger a transition toward a low-carbon economy. The authors prove that optimal marginal abatement costs should differ across sectors: they depend on the global carbon price, but also on sector-specific shadow costs of the sectoral abatement potential. The paper discusses the impact of the convexity of abatement investment costs: more rigid sectors are represented with more convex cost functions and should invest more in early abatement. The conclusion is that overlapping mitigation policies should not be discarded based on the argument that they set different marginal costs (`"different carbon prices"') in different sectors.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6154.

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Date of creation: 01 Aug 2012
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Handle: RePEc:wbk:wbrwps:6154
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  1. Vincent Viguie & Stéphane Hallegatte, 2012. "Trade-offs and synergies in urban climate policies," Post-Print hal-00716121, HAL.
  2. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
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  5. Grimaud, André & Lafforgue, Gilles & Magné, Bertrand, 2009. "Climate Change Mitigation Options and Directed Technical Change: A Decentralized Equilibrium Analysis," TSE Working Papers 09-063, Toulouse School of Economics (TSE).
  6. Adrien Vogt-Schilb & Stéphane Hallegatte, 2013. "When Starting with the Most Expensive Option Makes Sense On Marginal Abatement Cost Curves and Optimal Abatement Pathways," CIRED Working Papers hal-00626261, HAL.
  7. Reyer Gerlagh & Snorre Kverndokk & Knut Rosendahl, 2009. "Optimal Timing of Climate Change Policy: Interaction Between Carbon Taxes and Innovation Externalities," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(3), pages 369-390, July.
  8. Acemoglu, Daron & Aghion, Philippe & Bursztyn, Leonardo & Hemous, David, 2011. "The Environment and Directed Technical Change," CEPR Discussion Papers 8660, C.E.P.R. Discussion Papers.
  9. Fischer, Carolyn & Preonas, Louis, 2010. "Combining Policies for Renewable Energy: Is the Whole Less than the Sum of Its Parts?," 14th ICABR Conference, June 16-18, 2010, Ravello, Italy 188090, International Consortium on Applied Bioeconomy Research (ICABR).
  10. Malte Schwoon & Richard S.J. Tol, 2004. "Optimal CO2-abatement with socio-economic inertia and induced technological change," Working Papers FNU-37, Research unit Sustainability and Global Change, Hamburg University, revised Jan 2004.
  11. Grubb, Michael & Chapuis, Thierry & Duong, Minh Ha, 1995. "The economics of changing course : Implications of adaptability and inertia for optimal climate policy," Energy Policy, Elsevier, vol. 23(4-5), pages 417-431.
  12. Adrien Vogt-Schilb & Stéphane Hallegatte, 2012. "When Starting with the Most Expensive Option Makes Sense: Use and Misuse of Marginal Abatement Cost Curves," Post-Print hal-00797612, HAL.
  13. Minh Ha-Duong & Michael Grubb & Jean Charles Hourcade, 1997. "Influence of socioeconomic inertia and uncertainty on optimal CO2-emission abatement," Post-Print halshs-00002452, HAL.
  14. Shalizi, Zmarak & Lecocq, Franck, 2009. "Climate change and the economics of targeted mitigation in sectors with long-lived capital stock," Policy Research Working Paper Series 5063, The World Bank.
  15. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
  16. William D. Nordhaus, 1992. "Rolling the 'Dice': An Optimal Transition Path for Controlling Greenhouse Gases," Cowles Foundation Discussion Papers 1019, Cowles Foundation for Research in Economics, Yale University.
  17. Fischer, Carolyn & Newell, Richard, 2004. "Environmental and Technology Policies for Climate Mitigation," Discussion Papers dp-04-05, Resources For the Future.
  18. Lecocq, Franck & Hourcade, Jean-Charles & Ha Duong, Minh, 1998. "Decision making under uncertainty and inertia constraints: sectoral implications of the when flexibility," Energy Economics, Elsevier, vol. 20(5-6), pages 539-555, December.
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  21. Stavins, Robert & Jaffe, Adam & Newell, Richard, 2004. "A Tale of Two Market Failures: Technology and Environmental Policy," Discussion Papers dp-04-38, Resources For the Future.
  22. Strand, Jon, 2010. "Inertia in infrastructure development : some analytical aspects, and reasons for inefficient infrastructure choices," Policy Research Working Paper Series 5295, The World Bank.
  23. Braathen, Nils Axel, 2007. "Instrument Mixes for Environmental Policy: How Many Stones Should be Used to Kill a Bird?," International Review of Environmental and Resource Economics, now publishers, vol. 1(2), pages 185-235, May.
  24. Céline Guivarch & Stéphane Hallegatte, 2011. "Existing Infrastructure and the 2°C Target," Post-Print halshs-00724493, HAL.
  25. repec:hal:journl:hal-00626261 is not listed on IDEAS
  26. Manne, Alan & Richels, Richard, 2004. "The impact of learning-by-doing on the timing and costs of CO2 abatement," Energy Economics, Elsevier, vol. 26(4), pages 603-619, July.
  27. Jaccard, Mark & Rivers, Nic, 2007. "Heterogeneous capital stocks and the optimal timing for CO2 abatement," Resource and Energy Economics, Elsevier, vol. 29(1), pages 1-16, January.
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