Transition to clean capital, irreversible investment and stranded assets

Julie Rozenberg (), Adrien Vogt-Schilb and Stephane Hallegatte

No 6859, Policy Research Working Paper Series from The World Bank

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.

Keywords: Political Economy; Climate Change Mitigation and Green House Gases; Climate Change Economics; Economic Theory&Research; Investment and Investment Climate (search for similar items in EconPapers)
Date: 2014-05-01
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (36)

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