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Transition to clean capital, irreversible investment and stranded assets (English)

This paper uses a Ramsey model with two types of capital to analyze the optimal transition to clean capital when polluting investment is irreversible. The cost of climate mitigation decomposes as a technical cost of using clean instead of polluting capital and a transition cost from the irreversibility of pre-existing polluting capital. With a carbon price, the transition cost can be limited by underutilizing polluting capital, at the expense of a loss in the value of polluting assets (stranded assets) and a drop in income. In contrast, policy instruments that focus on redirecting investments -- such as feebates or environmental standards -- prevent underutilization of existing capital, avoid stranded assets, and reduce short-term losses; but they reduce emissions more slowly and increase the intertemporal cost of the transition. The paper investigates inter- and intra-generational distributional impacts and the political acceptability of climate change mitigation policy instruments.

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Citation

Hallegatte,Stephane Rozenberg,Julie Vogt-Schilb,Adrien Camille

Transition to clean capital, irreversible investment and stranded assets (English). Policy Research working paper ; no. WPS 6859 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/768841468171252748/Transition-to-clean-capital-irreversible-investment-and-stranded-assets