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Adjustment Time, Capital Malleability and Policy Cost

Abstract:
The cost of meeting Kyoto-style emissions reductions is heavily dependent on the malleability of an economy's stock of capital and the number of years available for adjustment. Each year of delay introduces more emissionproducing activities that must be squeezed out of the system and shortens the time horizon for change, raising the carbon price required to produce the needed changes in capital structure. The MIT Emissions Prediction and Policy Assessment model is used to explore the effects of uncertainty in the degree of capital malleability in the short run, and to analyze how implied carbon prices vary depending on the time of credible commitment to emissions targets.

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Energy Specializations: Energy Investment and Finance – Corporate Strategy; Energy and the Environment – Policy and Regulation

JEL Codes:
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Kyoto protocol, EPPA Model, CGE Models, Climate change policy, Uncertainty, Emissions Trade

DOI: 10.5547/ISSN0195-6574-EJ-Vol20-NoSI-4


Published in Volume 20, Special Issue - The Cost of the Kyoto Protocol: A Multi-Model Evaluation of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.