Transition to Clean Capital, Irreversible Investment and Stranded Assets

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.

Bibliographic Details

Main Authors:	Rozenberg, Julie, Vogt-Schilb, Adrien, Hallegatte, Stephane
Language:	English en_US
Published:	World Bank, Washington, DC 2014-05
Subjects:	ABATEMENT, ABATEMENT COST, ABATEMENT COSTS, AFFILIATED ORGANIZATIONS, ALLOCATION, ALLOWANCE, ALLOWANCE ALLOCATION, ARBITRAGE, ASSETS, ATMOSPHERE, ATMOSPHERIC CONCENTRATION, CAPITAL COSTS, CAPITAL MARKETS, CAPITAL PRODUCES, CAPITAL STOCKS, CARBON, CARBON BUDGET, CARBON EMISSIONS, CARBON INTENSITY, CARBON POLICY, CARBON PRICE, CARBON PRICES, CARBON TAX, CARBON TAXES, CLEAN AIR, CLEAN ELECTRICITY, CLEAN ENERGY, CLEAN TECHNOLOGIES, CLIMATE, CLIMATE CHANGE, CLIMATE CHANGE MITIGATION, CLIMATE DAMAGES, CLIMATE OBJECTIVES, CLIMATE POLICIES, CLIMATE POLICY, CO, CO2, COAL, COAL PLANT, COLLECTIVE ACTION, CONCENTRATION CEILING, CONSUMERS, COST OF ABATEMENT, COST OF CARBON, DAMAGES, DEPRECIATION, DEVELOPMENT POLICY, DISCOUNT RATE, DISCOUNT RATES, DISTRIBUTIONAL IMPACTS, ECOLOGICAL ECONOMICS, ECONOMIC CONDITIONS, ECONOMIC EFFICIENCY, ECONOMIC GROWTH, ECONOMICS, ELASTICITY, ELASTICITY OF SUBSTITUTION, ELECTRICITY PRODUCTION, EMISSION, EMISSION ALLOWANCES, EMISSION REDUCTIONS, EMISSIONS, ENERGY ECONOMICS, ENERGY EFFICIENCY, ENERGY EFFICIENCY STANDARDS, ENERGY INFRASTRUCTURE, ENERGY INTENSITY, ENERGY POLICY, ENERGY SAVINGS, ENERGY USE, ENVIRONMENTAL ECONOMICS, ENVIRONMENTAL POLICY, EQUILIBRIUM, EQUILIBRIUM ANALYSIS, EXTERNALITIES, EXTERNALITY, FINANCIAL MARKETS, FINANCIAL SUPPORT, FUNCTIONAL FORMS, GHG, GLOBAL EMISSIONS, GLOBAL WARMING, GREENHOUSE, GREENHOUSE EFFECT, GREENHOUSE GASES, GREENHOUSE GASES EMISSIONS, HUMAN CAPITAL, INCOME, INCOME EFFECT, INTEREST RATE, INTERGENERATIONAL EQUITY, INVESTMENT BEHAVIOR, INVESTMENT REGULATION, JOBS, LAISSEZ-FAIRE, LOW-CARBON, MARGINAL COST, MARGINAL PRODUCTIVITY, MARGINAL UTILITY, MARKET FAILURE, MULTIPLIERS, NEGATIVE EXTERNALITY, NOX, NUCLEAR POWER, PATENTS, PERFORMANCE STANDARD, PERFORMANCE STANDARDS, POLITICAL ECONOMY, POWER PLANTS, PRESENT VALUE, PRICE INCREASE, PRODUCTION FUNCTION, PROFITABILITY, PUBLIC GOODS, RATE OF RETURN, REBATES, REGULATORY CAPTURE, RELATIVE PRICE, RESOURCE ECONOMICS, SAVINGS, SECONDARY MARKETS, SHADOW PRICE, SHADOW PRICES, SOCIAL COST, STRANDED ASSETS, SUBSTITUTION, SUBSTITUTION EFFECT, TAX, TAX REVENUE, TRADE SYSTEM, TRADE-OFF, UNEMPLOYMENT, UTILITY FUNCTION, UTILITY MAXIMIZATION, VOTERS, WEALTH, WIND,
Online Access:	http://documents.worldbank.org/curated/en/2014/05/19457792/transition-clean-capital-irreversible-investment-stranded-assets https://hdl.handle.net/10986/18343
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