Climate Change and Clean Capital Accumulation: When To Invest ?

Abstract

Capturing CO2 from fossil fuels burning using Carbon Capture and Storage (CCS) technology or producing energy based on low-carbon renewables require investments in specific forms of long-life clean capital. The present paper focuses on the optimal accumulation of clean capital when the carbon-emitting resource, a fossil fuel, is exhaustible and the regulation takes the form of a cap over the CO2 concentration. By impacting differently the marginal value dynamics of CCS systems and renewables power plants, the exhaustibility of the carbon-emitting resource leads to different optimal investments paths. Investing in CCS systems before the CO2 concentration reaches the carbon cap is optimal if their depreciation is slow and the carbon-emitting resource is scarce enough, whereas it is never optimal to invest in renewables power plants before the CO2 concentration reaches the carbon cap, with constant investment costs. Investments in renewables power plants start to maintain the consumption flow at a level determined by their characteristics of cost and duration and by the energy demand. When the CO2 concentration is at the ceiling, energy may be provided at the ceiling by an energy mix based on fossil fuels with CCS and renewables. Introducing a pool of CCS technologies and renewables, differentiated only by their depreciation rate and their constant capital investment cost, we find that only one kind of renewables is used along the optimal path, whereas several CCS technologies may be used with long-life technologies in first place.