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Optimal climate policy as if the transition matters

Campiglio, Emanuele, Dietz, Simon ORCID: 0000-0001-5002-018X and Venmans, Frank ORCID: 0000-0002-4264-6606 (2022) Optimal climate policy as if the transition matters. Grantham Research Institute on Climate Change and the Environment Working Papers (387). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.

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Abstract

The optimal transition to a low-carbon economy must account for adjustment costs in switching from dirty to clean capital, technological progress, and economic and climatic shocks. We study the low-carbon transition using a dynamic stochastic general equilibrium model with emissions abatement costs calibrated on a large energy modelling database, solved with recursive methods. We show how capital inertia puts upward pressure on emissions and temperatures in the short run, but that nonetheless it is optimal to actively disinvest from – to ‘strand’ – a significant share of the dirty capital stock. Conversely, clean technological progress, as well as uncertainty about climatic and economic factors, lead to lower emissions and temperatures in the long run. Putting these factors together, we estimate a net premium of 33% on the optimal carbon price today relative to a ‘straw man’ model with perfect capital mobility, fixed abatement costs and no uncertainty.

Item Type: Monograph (Working Paper)
Official URL: https://www.lse.ac.uk/granthaminstitute/publicatio...
Additional Information: © 2022 The Authors
Divisions: Grantham Research Institute
Geography & Environment
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor
JEL classification: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C61 - Optimization Techniques; Programming Models; Dynamic Analysis
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate; Natural Disasters
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q55 - Technological Innovation
Date Deposited: 14 Dec 2022 14:33
Last Modified: 15 Sep 2023 23:58
URI: http://eprints.lse.ac.uk/id/eprint/117610

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