Optimal multi-phase transition paths toward a global green economy

Economic growth thus far has been closely linked to the bulk conversion of energy stored in carbon based fuels (wood, coal, oil, natural gas) into useful work. Burning such fuels gives rise to CO2-emissions. These emissions, together with other greenhouse gasses (GHG's) like methane, are now thought to be responsible for a considerable warming of the earth's atmosphere in the present and for years to come. That is bad news on a number of accounts: sea levels will rise, tropical diseases will become more wide-spread, storms will be more violent, patterns of rainfall will change (affecting agriculture), fresh water supply shortages will become a problem due to global glacier retreat, and so on. Most of these changes represent significant costs to society. There is much to be said then for avoiding these consequences of global warming, by reducing emissions or by adapting to the new situation. This paper summarizes part of the work conducted by the authors on the construction (and further extension) of a multi-phase transition model that incorporates the notion of embodiment of technical change on the one hand, the irreversibility of investment decisions, and the fact that the 'smooth' transition toward a carbon-free future will need to be prepared by means of the accumulation and subsequent run down of carbon-based production capacity, simply because capital, whether carbon-based or carbon free, is a produced means of production. The focus of the paper is therefore on the selective build-up and deactivation of different types of capital stocks, the time this takes, and the implications this has for the development over time of welfare specified in terms of the flow of consumption.