How Capital-Based Instruments Facilitate the Transition Toward a Low-Carbon Economy : A Tradeoff between Optimality and Acceptability

Rozenberg, JulieVogt-Schilb, AdrienHallegatte, Stephane2014-02-032014-02-032013-09https://hdl.handle.net/10986/16837This 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.en-USCC BY 3.0 IGOABATEMENT COSTSAFFILIATED ORGANIZATIONSAIRAIR QUALITYASSETSATMOSPHEREATMOSPHERIC CONCENTRATIONCALCULATIONCAPACITY UTILIZATIONCAPITAL ACCUMULATIONCAPITAL COSTCAPITAL COSTSCAPITAL STOCKCARBON CONTENTCARBON ECONOMYCARBON EMISSIONSCARBON INTENSITYCARBON PRICECARBON TAXCLEAN AIRCLEAN ENERGYCLIMATECLIMATE CHANGECLIMATE DAMAGESCLIMATE OBJECTIVESCLIMATE POLICIESCLIMATE POLICYCLOSED ECONOMYCOCO2COALCOAL PLANTCOMBUSTIONCONCENTRATION CEILINGCONSUMERSDAMAGESDEPRECIATIONDEVELOPMENT POLICYDISCOUNT RATEDISCOUNT RATESDYNAMIC ANALYSISECONOMIC RESEARCHECONOMIES OF SCALEELASTICITYELASTICITY OF SUBSTITUTIONELECTRICITYEMISSION REDUCTIONSEMISSION TARGETSENERGY EFFICIENCYENERGY EFFICIENCY STANDARDSENERGY INFRASTRUCTUREENVIRONMENTAL ECONOMICSENVIRONMENTAL POLICYENVIRONMENTAL PROTECTIONEQUILIBRIUMEXISTING INFRASTRUCTUREFINANCIAL MARKETSFUNCTIONAL FORMSFUTURE CONSUMPTIONGAS EMISSIONGHGGLOBAL ECONOMYGLOBAL EMISSIONSGLOBAL WARMINGGLOBALIZATIONGREEN CAPITALGREEN INVESTMENTGREEN INVESTMENTSGREENHOUSEGREENHOUSE GASGREENHOUSE GAS EMISSIONSGREENHOUSE GASESGREENHOUSE GASES EMISSIONSGREENHOUSE-GASHEAT PRODUCTIONHUMAN CAPITALINCOMEINCOME EFFECTINCREASING RETURNSINCREASING RETURNS TO SCALEINTEREST RATEINTEREST RATESINTERGENERATIONAL EQUITYINVESTMENT BEHAVIORINVESTMENT DECISIONSINVESTMENT REGULATIONIPCCJOBSLOW-CARBONMARGINAL ABATEMENTMARGINAL ABATEMENT COSTMARGINAL COSTMARGINAL PRODUCTIVITYMARGINAL REVENUEMARGINAL UTILITYMARKET FAILURESMONETARY TERMSMULTIPLIERSNEGATIVE EXTERNALITYOUTPUTPATENTSPOLITICAL ECONOMYPOLLUTIONPOWER PLANTSPRESENT VALUEPRODUCTION FUNCTIONPUBLIC ECONOMICSRATE OF RETURNREGULATORY CAPTURERESOURCE ECONOMICSRETURNS TO SCALESHADOW PRICESOCIAL COSTSOCIAL COST OF CARBONSTRUCTURAL CHANGESUBSTITUTION EFFECTSUSTAINABLE DEVELOPMENTTAX REVENUETECHNOLOGICAL CHANGETEMPERATURETOTAL COSTTRADE SYSTEMTURNOVERUNEMPLOYMENTUTILITY FUNCTIONUTILITY MAXIMIZATIONWINDHow Capital-Based Instruments Facilitate the Transition Toward a Low-Carbon Economy : A Tradeoff between Optimality and AcceptabilityWorld Bank10.1596/1813-9450-6609