To Build or Not to Build? Capital Stocks and Climate Policy

56 Pages Posted: 9 Apr 2018

See all articles by Elizabeth Baldwin

Elizabeth Baldwin

University of Oxford - Department of Economics; Hertford College, Oxford

Yongyang Cai

Ohio State University (OSU); Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Karlygash Kuralbayeva

University of Oxford

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2018

Abstract

We investigate how irreversibility in “dirty” and “clean” capital stocks affects optimal climate policy, from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our “irreversibility effect”. As such the “Green Paradox” has a converse if we focus on demand side capital stock effects. We also show that the optimal subsidy increases with the deployment rate: our “acceleration effect”. Considering second-best settings, we show that, although carbon taxes achieve stringent targets more efficiently, in fact renewable subsidies deliver higher welfare when policy is more mild.

Keywords: infrastructure, clean and dirty energy inputs, renewable energy, stranded assets, carbon budget, climate change policies, Green Paradox

JEL Classification: O440, Q540, Q580

Suggested Citation

Baldwin, Elizabeth and Cai, Yongyang and Kuralbayeva, Karlygash, To Build or Not to Build? Capital Stocks and Climate Policy (February 15, 2018). CESifo Working Paper Series No. 6884. Available at SSRN: https://ssrn.com/abstract=3156862

Elizabeth Baldwin (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

Hertford College, Oxford ( email )

Hertford College
Catte Street
Oxford, OX1 3BW
United Kingdom

HOME PAGE: http://elizabeth-baldwin.me.uk/

Yongyang Cai

Ohio State University (OSU) ( email )

Department of Agricultural, Environmental
and Development Economics
Columbus, OH 43210
United States

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

Karlygash Kuralbayeva

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, Oxfordshire OX1 3UQ
United Kingdom

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