All or nothing: Climate policy when assets can become stranded

Matthias Kalkuhl, Jan Steckel and Ottmar Edenhofer

Journal of Environmental Economics and Management, 2020, vol. 100, issue C

Abstract: This paper develops a new perspective on stranded assets in climate policy using a partial equilibrium model of the energy sector. Political-economy related aspects are considered in the government's objective function. Lobbying power of firms or fiscal considerations by the government lead to time inconsistency: The government will deviate from a previously announced carbon tax which creates stranded assets. Under rational expectations, we show that a time-consistent policy outcome exists with either a zero carbon tax or a prohibitive carbon tax that leads to zero fossil investments – an “all-or-nothing” policy. Although stranded assets are crucial to such a bipolar outcome, they disappear again under time-consistent policy. Which of the two outcomes (all or nothing) prevails depends on the lobbying power of owners of fixed factors (land and fossil resources) but not on fiscal revenue considerations or on the lobbying power of renewable or fossil energy firms.

Keywords: Climate policy; Optimal control; Political economy; Public finance; Credible policy; Time inconsistency (search for similar items in EconPapers)
JEL-codes: D72 H21 H23 Q54 Q58 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:100:y:2020:i:c:s0095069618302432

DOI: 10.1016/j.jeem.2019.01.012

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