Optimal climate policy as if the transition matters | Frank Venmans

Frank Venmans will be presenting the paper ‘Optimal Climate Policy As If the Transition Matters’ by Emanuele Campiglio, Simon Dietz and Frank Venmans. 

Abstract

While there is broad agreement that emissions should fall from their current record levels to very low levels eventually, how best to make the transition from a high- to low-carbon economy remains open for debate. Making the transition involves complex dynamics that go beyond basic models of emissions abatement and it is these dynamics that the authors aim to analyse with the model they develop in this paper.

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. The authors study the low-carbon transition using a model with emissions abatement costs calibrated on a large energy modelling database.

Most industrial capital, such as power plants, steel mills and cement factories, is based on fossil fuels. Rapid abatement of greenhouse gas emissions comes with an extra cost, because the existing infrastructure needs to be repurposed or set aside (‘stranded’). By contrast, more gradual abatement is cheaper, because green infrastructure can be installed after the dirty infrastructure comes to the end of its life.

The authors show that it is optimal to repurpose and strand a substantial amount of capital. However, capital inertia leads to significant emissions in the short run. Conversely, progress in developing clean technologies such as renewables, as well as uncertainty about climatic and economic factors, lead to lower emissions and temperatures in the long run. Putting these factors together, the authors 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.

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