Instrument Choice and Stranded Assets in the Transition to Clean Capital

Julie Rozenberg, Adrien Vogt-Schilb and Stephane Hallegatte

No 8205, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: To mitigate climate change, some governments opt for instruments focused on investment, like performance standards or feebates, instead of carbon prices. We compare these policies in a Ramsey model with clean and polluting capital, irreversible investment and a climate constraint. Alternative instruments imply different transitions to the same balanced growth path. The optimal carbon price minimizes the discounted social cost of the transition to clean capital, but imposes immediate private costs that disproportionately affect the current owners of polluting capital, in particular in the form of stranded assets. A phased-in carbon price can avoid stranded assets but still result in a drop of income for the owners of polluting capital when it is implemented. Second-best standards or feebates on new investment lead to higher total costs but avoid stranded assets, preserve the revenues of vested interests, and smooth abatement costs over individuals and time. These results suggest a trade-off between political feasibility and cost-effectiveness of environmental policies.

Keywords: clean capital; BIDcambioclima; stranded assets (search for similar items in EconPapers)
JEL-codes: L50 O33 O44 Q52 Q54 Q58 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-agr, nep-ene and nep-env
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Citations: View citations in EconPapers (21)

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Related works:
Journal Article: Instrument choice and stranded assets in the transition to clean capital (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:8205

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