Technology-specific capacity and the environment

Chapter 1 studies the role of investment-related emissions for the efficient distribution of investment among dirty and clean technologies. Dirty technology is not used depending on technology parameters, though clean technology may be relatively more expensive on all scales, and the societal effect of the first pollution unit may be small. In plausible cases there is a unique stationary point. Disregarding emissions from investment in dirty technology biases the stationary cost of polluting downward if dirty technology is used and the time discount factor is not too small. An inverse relationship between the cost of polluting and the marginal rate of intertemporal substitution of consumption on an optimal path is established. Chapter 2 examines the retirement of pre-existing capital and irreversible investment in dirty and clean technologies in Pareto optimum and competitive equilibrium. Dirty capacity is optimally underutilized in equilibrium if government policy internalizes the pollution externality after such policy is sufficiently long delayed. Dirty technology capital, for example, fossil-fuel using engines and plants, should be underutilized if pollution, such as atmospheric carbon dioxide, is below its long-term level. Underutilization of the pre-installed dirty technology capital diminishes it optimally because it is not needed in the long-term or smooths it through postponing its use until investment becomes worthwhile in dirty technology. Clean technology capital, for example, solar panels or wind turbines, are efficiently underutilized to save emissions from investment or because creating new units is more costly than forwarding existing units. Chapter 3 considers production using a dirty and reliable technology, for example, coal-using electricity generation, versus production using a clean and unreliable technology, for example, solar energy conversion into electricity, in a dynamic economy. Consumption can be equalized across states because investment absorbs the fluctuation in clean technology productivity in days in which consumption is maximized. Clean output subsidies such as feed-in premiums for grid-distributed electricity can implement a Pareto optimum. For example, the subsidy rebates a uniform energy tax or a uniform tax on investment goods. In a further example the subsidy is funded by price surcharges that are differentiated between households.