The Stranding Cost of Agricultural Subsidies under Climate-Transition and Biodiversity-Regulation Risks

Manh-Hung Nguyen

No 26-1746, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Anticipated carbon pricing and biodiversity regulation turn agricultural subsidies into stranded assets. In a continuous-time model of partially irreversible capital under Poisson policy arrival, calibrated to Danish dairy, the stranding loss is strictly convex in the capital overhang. Under full pass-through of CAP support into livestock capital, Common Agricultural Policy payments amplify the loss by a factor of 13.2; at a 25% pass-through the multiplier is 1.7. A second biodiversity risk contracts the capital target by 60 percent; expected stranding losses are super-modular in the subsidy pair in the risk-neutral benchmark and satisfy the same ranking numer-ically in the calibrated HJB, so joint reform dominates staged reform. The welfare-maximising subsidy is zero once the social cost of methane exceeds e 19/tCO2e.

Keywords: irreversible investment; policy risk; stranded assets; carbon taxation; biodiversity regulation; subsidy design (search for similar items in EconPapers)
JEL-codes: E22 H23 Q18 Q54 Q57 (search for similar items in EconPapers)
Date: 2026-05
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