Transition to Clean Capital, Irreversible Investment and Stranded Assets

29 Pages Posted: 20 Apr 2016

See all articles by Julie Rozenberg

Julie Rozenberg

CIRED, International Research Center on Environment & Development, France

Adrien Vogt-Schilb

CIRED, Centre international de recherche sur l’environnement et le développement

S. Hallegatte

World Bank

Date Written: May 1, 2014

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

Suggested Citation

Rozenberg, Julie and Vogt-Schilb, Adrien and Hallegatte, Stephane, Transition to Clean Capital, Irreversible Investment and Stranded Assets (May 1, 2014). World Bank Policy Research Working Paper No. 6859. Available at SSRN: https://ssrn.com/abstract=2433812

Julie Rozenberg (Contact Author)

CIRED, International Research Center on Environment & Development, France ( email )

Campus du Jardin Tropical
45 bis avenue de la Belle Gabrielle
F94736 Nogent sur Marne Cedex
France

Adrien Vogt-Schilb

CIRED, Centre international de recherche sur l’environnement et le développement ( email )

France

Stephane Hallegatte

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States

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