Irreversible investment and transition to clean capital

This paper analyses the optimal transition from dirty to clean capital when investment is irreversible. The cost of the transition has two components: the technical cost of investing in clean capital instead of polluting capital, and a temporary irreversibility cost. With a carbon price, the irreversibility cost can be reduced by under-utilizing polluting capital. By preventing under-utilization of existing capital, instruments that focus on redirecting investments — such as feebate programs or environmental standards on new capital — reduce shortterm losses but increase the intertemporal cost of the transition. We discuss implications regarding interand intra-generational distributional impacts of climate change mitigation.