Webinars in Economics of Environment, Energy and Transports
At 4pm on Zoom and has a duration of 60 minutes, with questions at the end.
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Frank VENMANS (Granham Institute On Climate Change – LSE)
Optimal transition to a low-carbon economy in the presence of stranded assets, falling technology costs and uncertainty
Abstract
In the long run, greenhouse gas emissions will have to be virtually eliminated for global temperatures to stop rising. But how best to get there remains an open question, as economic models often abstract from key features of the transition to a low-carbon economy. We study a dynamic stochastic general equilibrium model that includes several of these features: (i) capital inertia, slowing the accumulation of clean capital and leaving dirty capital `stranded’; (ii) falling technology costs due to experience/learning; (iii) economic and climatic uncertainties, including Barro-style macroeconomic disasters that can result from crossing climate tipping points. We use recursive dynamic programming methods, so the optimal transition path anticipates and adapts to shocks. We calibrate emissions abatement costs and stranded assets on a large database of detailed energy modelling, using maximum likelihood techniques. We find that on the optimal path carbon prices start high and grow slowly, and more than a trillion dollars of dirty capital assets should be left stranded over the course of this decade, substantially more if a 1.5°C limit is applied.