Do We Still Need Carbon-Intensive Capital When Transitioning to a Green Economy?

This paper discusses capital (dis)investments associated with climate regulations in green growth transitions. We first show an empirically confirmed stylized fact that carbon-intensive capital does not necessarily fall sharply with the stepping-of of clean capital investment. We then incorporate this feature into an endogenous growth model with carbon-temperature dynamics to derive the efficient path of green growth, and to explore the mechanism why carbon-intensity capital is still needed when transitioning to a low-carbon economy. We highlight that allowing for endogenous adjustment of clean capital makes it possible to sustain continual investments in carbon-intensive capital, depending on the extent of learning-by-doing effects. Therefore, this paper illuminates a potential way on how an economy pursuing green growth transitions could avoid the disinvestment in carbon-intensive capital caused by stringent climate regulations