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

Elizabeth Baldwin (), Yongyang Cai () and Karlygash Kuralbayeva

No 6884, CESifo Working Paper Series from CESifo Group Munich

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 (search for similar items in EconPapers)
JEL-codes: O44 Q54 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-res
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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Working Paper: To build or not to build? Capital stocks and climate policy (2018) Downloads
Working Paper: To Build or not to Build? Capital Stocks and Climate Policy (2018) Downloads
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