Optimal Climate Policy as If the Transition Matters

Emanuele Campiglio, Simon Dietz and Frank Venmans

No 10139, CESifo Working Paper Series from CESifo

Abstract: The optimal transition to a low-carbon economy must account for adjustment costs in switching from dirty to clean capital, technological progress, and economic and climatic shocks. We study the low-carbon transition using a dynamic stochastic general equilibrium model with emissions abatement costs calibrated on a large energy modelling database, solved with recursive methods. We show how capital inertia puts upward pressure on emissions and temperatures in the short run, but that nonetheless it is optimal to actively disinvest from – to ‘strand’ – a significant share of the dirty capital stock. Conversely, clean technological progress, as well as uncertainty about climatic and economic factors, lead to lower emissions and temperatures in the long run. Putting these factors together, we estimate a net premium of 33% on the optimal carbon price today relative to a ‘straw man’ model with perfect capital mobility, fixed abatement costs and no uncertainty.

Keywords: adjustment costs; carbon price; climate change; low-carbon transition; stranded assets; technological progress; uncertainty (search for similar items in EconPapers)
JEL-codes: C61 E22 H23 O44 Q54 Q55 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-dge, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp10139.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Unavailable

Related works:
Working Paper: Optimal climate policy as if the transition matters (2022)
Working Paper: Optimal climate policy as if the transition matters (2022)
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:ces:ceswps:_10139

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().