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...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2014/05/19457792/transition-clean-capital-irreversible-investment-stranded-assets http://hdl.handle.net/10986/18343 |
| Summary: | 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. |
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