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How capital-based instruments facilitate the transition toward a low-carbon economy: a tradeoff between optimality and acceptability

Julie Rozenberg (), Adrien Vogt-Schilb and Stephane Hallegatte

No 6609, Policy Research Working Paper Series from The World Bank

Abstract: This paper compares the temporal profile of efforts to curb greenhouse gas emissions induced by two mitigation strategies: a regulation of all emissions with a carbon price and a regulation of emissions embedded in new capital only, using capital-based instruments such as investment regulation, differentiation of capital costs, or a carbon tax with temporary subsidies on brown capital. A Ramsey model is built with two types of capital: brown capital that produces a negative externality and green capital that does not. Abatement is obtained through structural change (green capital accumulation) and possibly through under-utilization of brown capital. Capital-based instruments and the carbon price lead to the same long-term balanced growth path, but they differ during the transition phase. The carbon price maximizes social welfare but may cause temporary under-utilization of brown capital, hurting the owners of brown capital and the workers who depend on it. Capital-based instruments cause larger intertemporal welfare loss, but they maintain the full utilization of brown capital, smooth efforts over time, and cause lower immediate utility loss. Green industrial policies including such capital-based instruments may thus be used to increase the political acceptability of a carbon price. More generally, the carbon price informs on the policy effect on intertemporal welfare but is not a good indicator to estimate the impact of the policy on instantaneous output, consumption, and utility.

Keywords: Climate Change Mitigation and Green House Gases; Economic Theory&Research; Climate Change Economics; Investment and Investment Climate; Emerging Markets (search for similar items in EconPapers)
Date: 2013-09-01
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg, nep-res and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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