Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital

Oskar Lecuyer () and Adrien Vogt-Schilb ()
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Adrien Vogt-Schilb: CIRED - centre international de recherche sur l'environnement et le développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique

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Abstract: Climate change mitigation requires to replace preexisting carbon-intensive capital with different types of cleaner capital. Coal power and inefficient thermal engines may be phased out by gas power and efficient thermal engines or by renewable power and electric vehicles. We derive the optimal timing and costs of investment in a low- and a zero-carbon technology, under an exogenous ceiling constraint on atmospheric pollution. Producing output from the low-carbon technology requires to extract an exhaustible resource. A general finding is that investment in the expensive zero-carbon technology should always be higher than, and can optimally start before, investment in the cheaper low-carbon technology. We then provide illustrative simulations calibrated with data from the European electricity sector. The optimal investment schedule involves building some gas capacity that will be left unused before it naturally depreciates, a process known as \textit{mothballing} or \textit{early scrapping}. Finally, the levelized cost of electricity (LCOE) is a misleading metric to assess investment in new capacities. Optimal LCOEs vary dramatically across technologies. Ranking technologies according to their LCOE would bring too little investment in renewable power, and too much in the intermediate gas power.

Keywords: fossil-fueled capital; zero-carbon capital; exhaustible resources; irreversible investment; adjustment costs; carbon budget (search for similar items in EconPapers)
Date: 2013-08-07
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg, nep-res and nep-spo
Note: View the original document on HAL open archive server: https://enpc.hal.science/hal-00850680
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Related works:
Working Paper: Assessing and Ordering Investment in Polluting Fossil-fueled and Zero-carbon Capital (2014)
Working Paper: Assessing and Ordering Investment in Polluting Fossil-fueled and Zero-carbon Capital (2014)
Working Paper: Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital (2013)
Working Paper: Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital (2013)
Working Paper: Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital (2013)
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