Build Today, Regret Tomorrow? Infrastructure and Climate Policy

Elizabeth Baldwin, Yongyang Cai and Karlygash Kuralbayeva

No 332887, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: The timing of optimal policy to combat climate change is controversial: while some advocate a "gradual slope" in policy, others emphasize the importance of redirecting investments rapidly if we hope to meet a "2 degree" goal. We consider this question in the light of irreversible "dirty" and "clean" investments, such as in coal-fi_x000c_red and solar electricity generation. This leads to a "Reverse Green Paradox": the knowledge of an increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term. This contrasts with the well-known effects of such policy on the suppliers of fossil fuels, such as coal mines. So stranded assets play opposing roles, depending on whether these assets supply or demand fossil fuels. Additionally, we show that it is optimal to begin deployment of clean technologies early, if their cost decreases with their cumulative deployment (as has been clearly observed for solar power). We derive these results theoretically, and quantify optimal policies in a dynamic general equilibrium climate-economy model.

Keywords: Environmental; Economics; and; Policy (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:332887

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