{"id":63563,"date":"2026-05-07T11:55:50","date_gmt":"2026-05-07T10:55:50","guid":{"rendered":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?post_type=publication&p=63563"},"modified":"2026-05-07T12:05:37","modified_gmt":"2026-05-07T11:05:37","slug":"optimal-climate-policy-as-if-the-transition-matters","status":"publish","type":"publication","link":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/optimal-climate-policy-as-if-the-transition-matters\/","title":{"rendered":"Optimal climate policy as if the transition matters<\/strong>"},"content":{"rendered":"\n

The transition to a low-carbon economy is constrained by frictions in scaling up clean energy and phasing out existing fossil-fuel assets. This paper studies what optimal climate policy looks like in these circumstances, with the authors exploring the tension between the urgent need for rapid greenhouse gas emissions reductions, on the one hand, and concerns about the feasibility and cost of achieving them, on the other.<\/p>\n\n\n\n

The authors model a scenario in which reducing emissions requires capital to be reallocated from dirty to clean energy production under real-world constraints. A central feature is the introduction of heterogeneous dirty capital –  i.e. capital whose emissions intensity varies depending on the fuel and technology used – which the authors calibrate using detailed firm-level data. This allows the authors to identify a highly emissions-intensive subset of assets: the ‘dirty tail’. The model shows that large emissions reductions can be achieved by targeting the early retirement of the dirty tail, rather than reducing all fossil capital proportionately.<\/p>\n\n\n\n

The authors’ modelling includes limits to how quickly clean capital can be scaled up and dirty capital can be retired. This implies that the transition cannot occur instantaneously, creating capital inertia that constrains the speed of emissions reductions. The authors calibrate these adjustment costs on recent episodes of rapid energy system expansions and coal phase-outs.<\/p>\n\n\n\n

The main result is that, despite these constraints, the optimal transition to a low-carbon economy is rapid and front-loaded. Emissions fall steeply in the near term, driven by immediate disinvestment from the assets in the dirty tail, followed by a more gradual phase in which remaining dirty capital is allowed to depreciate, while clean capital continues to expand.<\/p>\n\n\n\n

Overall, the paper shows that taking transition constraints seriously changes how emissions reductions are achieved, emphasising the composition and timing of capital reallocation. However, these constraints do not overturn the case for rapid decarbonisation. Instead, they point to the importance of targeted, early action on the most polluting assets, as well as action to ease bottlenecks in expanding clean capital. <\/p>\n\n\n\n

Key points for decision-makers<\/h2>\n\n\n\n