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How clean capital slows down disinvestment of carbon-intensive capital in the low-carbon transition

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  • Jin, Wei
  • van der Ploeg, Frederick
  • Zhang, Lin

Abstract

This paper explores a novel mechanism through which transitions to a low-carbon economy can proceed smoothly without excessive disinvestment in carbon-intensive capital. The mechanism is analyzed in a Lucas-Uzawa green growth model with carbon-temperature dynamics. Due to the externalities associated with climate damages and learning by doing, insufficient resources are allocated towards investment in clean capital in the business-as-usual market economy. Without green subsidies to stimulate clean capital investment, pricing emissions to internalize the social cost of carbon causes disinvestment in carbon-intensive capital and increases the costs of low-carbon transitions. Pricing emissions and subsidizing clean investment yield a higher return on clean capital and boost clean capital accumulation. This curbs disinvestment in carbon-intensive capital and limits carbon emissions. This highlights the positive role of clean capital for smoothing low-carbon transitions.

Suggested Citation

  • Jin, Wei & van der Ploeg, Frederick & Zhang, Lin, 2024. "How clean capital slows down disinvestment of carbon-intensive capital in the low-carbon transition," Journal of Economic Dynamics and Control, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:dyncon:v:162:y:2024:i:c:s0165188924000496
    DOI: 10.1016/j.jedc.2024.104857
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    More about this item

    Keywords

    Green growth; Low-carbon transition; Carbon pricing; Learning-by-doing; Lucas-Uzawa growth model;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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