How to accomplish the transition to a low-carbon energy industry in a socially optimal way is one of the major subjects in ongoing debates on climate and energy policy. Diffe- rent abatement options, such as demand reduction, efficiency increases, the substitution of polluting energy sources, and emission capture and sequestration, side in these discussions with different policy approaches. Common among the latter are environmental regulations that price emissions, and technology policies to foster energy efficiency and progress in green technologies. However, the transformation of the established polluting into a new less polluting, or even clean, system of energy generation has been proving as inherently time-consuming. One important reason is that conventional power plants, on which production is still mainly based, are particularly long-lived and cost-intensive capital goods with long construction times. At the same time, due to finite lifetimes their renewal in the course of reinvestment cycles constitutes a recurrent phenomenon. Usually associated with structural change, i.e. a shift in the relative use of different generation technologies, these cycles constitute a particular point at which various technological innovations may materialise.
KeywordsTime Preference Capital Accumulation Market Failure Technology Policy Social Optimum
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