Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271783 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10139
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
adjustment costs
carbon price
climate change
low-carbon transition
stranded assets
technological progress
uncertainty
JEL: 
C61
E22
H23
O44
Q54
Q55
Document Type: 
Working Paper
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