The Political Economy of Stranded Assets: Climate Policies, Investments and the Role of Elections

Achim Hagen and Gilbert Kollenbach

No 33, Berlin School of Economics Discussion Papers from Berlin School of Economics

Abstract: We study the interaction of climate policies and investments into fossil and renewable energy generation capacity if policies are set by democratically elected governments and can lead to stranded assets. We develop an overlapping generations model, where elections determine carbon taxation and green investment subsidies, and individuals make investments into fossil and renewable capacity. We find that some fossil investments become stranded assets, if the party offering the higher carbon tax is unexpectedly elected. In contrast, if the individuals have perfect foresight, there are no stranded assets, climate damages are fixed and carbon taxation only serves redistributive purposes. Then, there is either no or prohibitive carbon taxation and energy generation completely relies on renewables in the latter case. Green investment subsidies can be used by governments to bind the hands of their successor. If the party representing the young generation is in power, it can use a high subsidy to reduce or even avoid potentially stranded assets in the next period. With endogenous reelection probability, we show that this party can also use investment subsidies strategically to influence the elections. The party that represents the old generation abstains from both types of climate policies to avoid a redistribution of income towards the young generation.

Keywords: Stranded Assests; Political Economy; Fossil Fuel; Renewable Energy; Carbon Tax; Investment Subsidy (search for similar items in EconPapers)
JEL-codes: D72 H23 Q54 Q58 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2024-03-06
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://opus4.kobv.de/opus4-hsog/files/5348/BSoE_DP_0033.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdp:dpaper:0033

DOI: 10.48462/opus4-5348

Access Statistics for this paper

More papers in Berlin School of Economics Discussion Papers from Berlin School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Reiter ().