IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/6859.html
   My bibliography  Save this paper

Transition to clean capital, irreversible investment and stranded assets

Author

Listed:
  • Rozenberg, Julie
  • Vogt-Schilb, Adrien
  • Hallegatte, Stephane

Abstract

This paper uses a Ramsey model with two types of capital to analyze the optimal transition to clean capital when polluting investment is irreversible. The cost of climate mitigation decomposes as a technical cost of using clean instead of polluting capital and a transition cost from the irreversibility of pre-existing polluting capital. With a carbon price, the transition cost can be limited by underutilizing polluting capital, at the expense of a loss in the value of polluting assets (stranded assets) and a drop in income. In contrast, policy instruments that focus on redirecting investments -- such as feebates or environmental standards -- prevent underutilization of existing capital, avoid stranded assets, and reduce short-term losses; but they reduce emissions more slowly and increase the intertemporal cost of the transition. The paper investigates inter- and intra-generational distributional impacts and the political acceptability of climate change mitigation policy instruments.

Suggested Citation

  • 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.
  • Handle: RePEc:wbk:wbrwps:6859
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/05/06/000158349_20140506114857/Rendered/PDF/WPS6859.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2012. "The Environment and Directed Technical Change," American Economic Review, American Economic Association, vol. 102(1), pages 131-166, February.
    2. Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 438-450.
    3. Tsvetanov, Tsvetan & Segerson, Kathleen, 2013. "Re-evaluating the role of energy efficiency standards: A behavioral economics approach," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 347-363.
    4. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, vol. 101(407), pages 920-937, July.
    5. Jean-Jacques Laffont & Jean Tirole, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1089-1127.
    6. Goulder, Lawrence H. & Hafstead, Marc A.C. & Dworsky, Michael, 2010. "Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 161-181, November.
    7. Slechten, Aurélie, 2013. "Intertemporal links in cap-and-trade schemes," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 319-336.
    8. Roberton C. Williams III, 2011. "Setting the Initial Time-Profile of Climate Policy: The Economics of Environmental Policy Phase-Ins," NBER Chapters,in: The Design and Implementation of U.S. Climate Policy, pages 245-254 National Bureau of Economic Research, Inc.
    9. Soren T. Anderson & Ian W. H. Parry & James M. Sallee & Carolyn Fischer, 2011. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(1), pages 89-108, Winter.
    10. Reyer Gerlagh & Snorre Kverndokk & Knut Rosendahl, 2009. "Optimal Timing of Climate Change Policy: Interaction Between Carbon Taxes and Innovation Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(3), pages 369-390, July.
    11. Parry, Ian W.H. & Evans, David & Oates, Wallace E., 2014. "Are energy efficiency standards justified?," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 104-125.
    12. Grimaud, André & Lafforgue, Gilles & Magné, Bertrand, 2011. "Climate change mitigation options and directed technical change: A decentralized equilibrium analysis," Resource and Energy Economics, Elsevier, vol. 33(4), pages 938-962.
    13. Sterner, Thomas & Hoglund Isaksson, Lena, 2006. "Refunded emission payments theory, distribution of costs, and Swedish experience of NOx abatement," Ecological Economics, Elsevier, vol. 57(1), pages 93-106, April.
    14. 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.
    15. Céline Guivarch & Stéphane Hallegatte, 2011. "Existing infrastructure and the 2°C target," Climatic Change, Springer, vol. 109(3), pages 801-805, December.
    16. Chichilnisky, Graciela & Heal, Geoffrey & Beltratti, Andrea, 1995. "The Green Golden Rule," Economics Letters, Elsevier, vol. 49(2), pages 175-179, August.
    17. Hunt Allcott, 2013. "The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market," American Economic Journal: Economic Policy, American Economic Association, vol. 5(3), pages 30-66, August.
    18. 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.
    19. Chichilnisky, Graciela & Beltratti, Andrea & Heal, Geoffrey, 1994. "The environment and the long run: A comparison of different criteria," MPRA Paper 7907, University Library of Munich, Germany.
    20. Jean Charles Hourcade & Philippe Ambrosi & Stéphane Hallegatte & Franck Lecocq & Patrice Dumas & Minh Ha-Duong, 2003. "Optimal control models and elicitation of attitudes towards climate damages," Post-Print halshs-00000966, HAL.
    21. Chao Wei, 2003. "Energy, the Stock Market, and the Putty-Clay Investment Model," American Economic Review, American Economic Association, vol. 93(1), pages 311-323, March.
    22. Lawrence H. Goulder & Ian W. H. Parry, 2008. "Instrument Choice in Environmental Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(2), pages 152-174, Summer.
    23. Fischer, Carolyn, 2008. "Comparing flexibility mechanisms for fuel economy standards," Energy Policy, Elsevier, vol. 36(8), pages 3106-3114, August.
    24. Arrow, Kenneth J & Kurz, Mordecai, 1970. "Optimal Growth with Irreversible Investment in a Ramsey Model," Econometrica, Econometric Society, vol. 38(2), pages 331-344, March.
    25. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sam Fankhauser & Frank Jotzo, 2017. "Economic growth and development with low-carbon energy," CCEP Working Papers 1705, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
    2. Marianne Fay & Stephane Hallegatte & Adrien Vogt-Schilb & Julie Rozenberg & Ulf Narloch & Tom Kerr, 2015. "Decarbonizing Development," World Bank Publications, The World Bank, number 21842, April.
    3. Campiglio, Emanuele, 2016. "Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy," Ecological Economics, Elsevier, vol. 121(C), pages 220-230.
    4. Pegels, Anna & Lütkenhorst, Wilfried, 2014. "Is Germany׳s energy transition a case of successful green industrial policy? Contrasting wind and solar PV," Energy Policy, Elsevier, vol. 74(C), pages 522-534.
    5. Elizabeth Baldwin & Yongyang Cai & Karlygash Kuralbayeva, 2018. "To Build or Not to Build? Capital Stocks and Climate Policy," CESifo Working Paper Series 6884, CESifo Group Munich.
    6. 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.
    7. Moutaz Altaghlibi & Florian Wagener, 2016. "Unconditional Aid and Green Growth," Tinbergen Institute Discussion Papers 16-037/II, Tinbergen Institute.
    8. Adrien Vogt-Schilb & Stephane Hallegatte, 2017. "Climate Policies and Nationally Determined Contributions: Reconciling the Needed Ambition with the Political Economy," IDB Publications (Working Papers) 8319, Inter-American Development Bank.
    9. Oskar Lecuyer & Adrien Vogt-Schilb, 2014. "Optimal Transition from Coal to Gas and Renewable Power under Capacity Constraints and Adjustment Costs," Working Papers hal-01057241, HAL.
    10. Stephane Hallegatte & Mook Bangalore & Laura Bonzanigo & Marianne Fay & Tamaro Kane & Ulf Narloch & Julie Rozenberg & David Treguer & Adrien Vogt-Schilb, 2016. "Shock Waves," World Bank Publications, The World Bank, number 22787, April.

    More about this item

    Keywords

    Political Economy; Climate Change Mitigation and Green House Gases; Climate Change Economics; Economic Theory&Research; Investment and Investment Climate;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:6859. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: http://edirc.repec.org/data/dvewbus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.