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To build or not to build? Capital stocks and climate policy

Elizabeth Baldwin, Yongyang Cai, Karlygash Kuralbayeva
Authors registered in the RePEc Author Service: Yongyang Cai (), Elizabeth Baldwin () and Karlygash Kuralbayeva

No 290, GRI Working Papers from Grantham Research Institute on Climate Change and the Environment

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.

Date: 2018-01
New Economics Papers: this item is included in nep-ene and nep-env
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Working Paper: To Build or not to Build? Capital Stocks and Climate Policy (2019) Downloads
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