Climate Change and the Economics of Targeted Mitigation in Sectors
with Long-Lived Capital Stock

Mitigation investments in long-lived
capital stock (LLKS) differ from other types of mitigation
investments in that, once established, LLKS can lock-in a
stream of emissions for extended periods of time. Moreover,
historical examples from industrial countries suggest that
investments in LLKS projects or networks tend to be lumpy,
and tend to generate significant indirect and induced
emissions besides direct emissions. Looking forward,
urbanization and rapid economic growth suggest that similar
decisions about LLKS are being or will soon be made in many
developing countries. In their current form, carbon markets
do not provide correct incentives for mitigation investments
in LLKS because the constraint on carbon extends only to
2012, and does not extend to many developing countries.
Targeted mitigation programs in regions and sectors in which
LLKS is being built at rapid rate are thus necessary to
avoid getting locked into highly carbon-intensive LLKS. Even
if the carbon markets were extended (geographically,
sectorally, and over time), public intervention would still
be required, for three main reasons. First, to ensure that
indirect and induced emissions associated with LLKS are
taken into account in investor s financial cost-benefit
analysis. Second, to facilitate project or network financing
to bridge the gap between carbon revenues that accrue over
time as the project/network unfolds and the capital needed
upfront to finance lumpy investments. Third, to internalize
other non-carbon externalities (e.g., local pollution)
and/or to lift barriers (e.g., lack of capacity to handle
new technologies) that penalize the low-carbon alternatives
relative to the high-carbon ones.