![Sample our Global Development journals, sign in here to start your access, latest two full volumes FREE to you for 14 days]({"type":"image" , "src" : "/sda/5929/TOC-Subject-Sample-2021-Global-Development.jpg"})
Abstract
Once established, long-lived capital stock (LLKS) such as infrastructure can lock-in a stream of GHG emissions for extended periods of time. Historical examples from industrial countries suggest that investments in LLKS projects and networks are often lumpy and concentrated in time, and often generate significant indirect and induced emissions besides direct emissions. Urbanization and rapid economic growth suggest that similar investments in LLKS projects and networks are being or will soon be made in many developing countries. In their current form, carbon markets do not provide correct incentives for mitigation in LLKS because the constraint on emissions is limited to developed countries and extends only to 2012. Targeted mitigation programmes are thus necessary where LLKS is being built at a rapid rate to avoid getting locked into highly emissions-intensive LLKS. Even if carbon markets were extended geographically, sectorally, and over time, public intervention would still be required to ensure that indirect and induced emissions are accounted for, to facilitate LLKS project/network financing that bridges the gap between carbon revenues accruing over time and capital needed up front to finance lumpy investments, and to internalize other externalities (e.g. local pollution) and/or lift other barriers that penalize low-emissions alternatives relative to high-emissions ones.
Policy relevance
LLKS is rapidly being built in developing countries and ‘renewed’/upgraded in developed ones. Investment in LLKS programmes/networks, not just in individual projects, tends to be concentrated in time, two-thirds of which typically takes place in the first quarter of the programme's operating life. Initial/prototype projects can lock in commitment to a particular technology for the whole programme, thus requiring they be evaluated as part of a programme, and not on a stand-alone basis. In addition, indirect and induced emissions of LLKS programmes can be significant. However, scarce empirical evidence affects the utility of cost–benefit analysis in selecting projects or programmes. Finally, addressing the carbon externality alone (whether by market prices, taxes, or regulations) is insufficient to create a level playing field between low- and high-emission LLKS. Removing non-price barriers requires identification of binding constraints, selection of instruments to address them, and mechanisms to learn from and share experiences amongst countries and regions.
Acknowledgements
The authors gratefully acknowledge financial support from the World Bank World Development Report (2010) and logistical support from AgroParisTech for the preparation of this article. We would also like to thank Ken Chomitz, Marianne Fay, Jon Strand, the World Development Report 2010 team, participants of the International Conference on Infrastructure Economics and Development (Toulouse, 2010), the 3rd LCS-RNet conference (Paris, 2011) and seminars at the World Bank, as well as four anonymous reviewers for very useful comments on previous versions of the article.
Supplemental data
Supplemental data for this article can be accessed http://dx.doi.org/10.1080/14693062.2014.861657.
Notes
1. Vogt-Shilb, Meunier, and Hallegatte (Citation2012) argue that marginal investment costs in capital stock that reduce emissions permanently should not be equal across sectors. It remains an open question whether their equilibrium can be decentralized using a carbon market.
2. This division is based on the threefold categorization in Jaccard (Citation1997) and Jaccard and Rivers (Citation2007). Jaccard's second group has here been split into two to distinguish factories and power plants (referred to as Group 2 in the main text) from infrastructure networks (Group 3 in the main text). ‘Long-run’ and ‘short-run’ refer to the life duration of capital stock, and not to the traditional division between periods of time over which all (vs. not all) production factors can be varied in the production function.
3. Buildings are here moved from Jaccard's Category 2 (Group 3) to his Category 3 (Group 4), in light of the Jaccard and Rivers (Citation2007) analysis, which suggests that their lifespan can exceed a century.
4. With the readily available data, we were not able to determine whether capacity expansion at the global level is lumpy or not. It is presumed that it is less so than at the national level.
5. In their very interesting paper, Duranton and Turner (Citation2011) argue that the demand for traffic on roads is a function of the supply of roads – with a long-run elasticity of one. Restricting traffic will not necessarily conserve energy. At the point where congestion kicks in, traffic will be restricted but at the expense of higher energy demand. To that extent, as long as that energy demand from traffic is fossil-fuel-based, emissions will be a function of installed capacity. However, Duranton and Turner (Citation2011) did not include alternative options for supplying energy to move vehicles in their analysis.
6. In the IEA (2012) 450 ppm scenario, nearly half of the emissions reductions relative to the baseline by 2035 come from reduced energy demand, rather than fuel switching towards low- or zero-carbon alternatives.
7. This is a positive, and not a normative, statement. It is not evaluated here whether or not the welfare gains associated with higher gross domestic product in the US have been greater than the value of the externality created by the higher GHG emissions.
8. See Section 3.1.
9. This historical example aims to illustrate how investments in networks of LLKS can lock in a country's emission path over a long period of time, even though they unfold in a very short period of time. This example does not discuss or evaluate the overall merits of nuclear power generation, neither historically for France, nor in the future for France or for other countries.
10. With excess supply, marginal cost pricing requires zero price or a subsidy. It is thus only available to governments (which can use taxes for financing) and not to private entities.
11. Duranton and Turner (Citation2011) noted that, from the 1930s to 1960s, road network expansion in many places was made cheaper by converting railroad right-of-way to road uses. This would also have undermined the restoration of an extensive and dense railroad network at the time the IHS was being contemplated.
12. IHS emissions are estimated by taking 25% of total emissions associated with road transportation in the US (because the IHS represents 25% of total VMTs). This is probably an understatement, because trucks, which represent a disproportionate share of travel on Interstates, emit more per VMT than cars.
13. Although Box 2 focuses on CO2 emissions, it should not be interpreted as downplaying the other externalities associated with transportation. In fact, transport projects/networks should be designed to solve transportation problems first. Conversely, solving the carbon externality may do nothing to solve these other externalities. For example, congestion may still be a problem with zero-carbon cars.
14. See the extensive discussion of the origins of the IHS by Lee Mertz, available at http://www.fhwa.dot.gov/infrastructure/origin.htm.
15. Although the concept of increasing returns has a long tradition in economic history, the implications of increasing returns and other cumulative mechanisms have only been systematically explored over the past three decades or so, notably around issues of monopolistic competition (Dixit & Stiglitz, Citation1977), international trade (Krugman, Citation1979), adoption of technologies (Arthur, Citation1983), or economic growth (Romer, Citation1990).
16. In standard CBA, sunk costs (i.e. costs associated with past investments) are irrelevant to new investment decisions. This may seem at odds with the notion of lock-in, which suggests that extensions or subsequent steps are affected by initial investments or earlier steps. However, there is no inconsistency here. Although sunk costs are not accounted for in determining the cost–benefit ratio of the extension, the stream of future costs and benefits associated with the extension may be different because of the earlier investments. For example, if the backbone of a ring road has been built, then building a new road to connect a suburb to that ring road (as opposed to building a rail track) becomes much cheaper than it would have been had that initial investment in the ring road not been made.
17. This was computed as follows: on the energy supply side, electricity and heat generation represent 25.2% of total global GHG emissions in 2000 (World Resources Institute, 2009). These emissions are a direct function of the energy-producing LLKS (Group 2). On the energy demand side, emissions from transportation – 11.9% of the global total – are generated by relatively short-lived end-use equipment (Group 1), but the demand for transportation, and thus for energy, derives to a large extent from the complementary transportation infrastructure that is in place, and from urban forms induced by it (Groups 3 and 4). Similarly, direct emissions from the residential sector (including energy directly consumed by the residential sector for heating, cooking, or heating, but excluding the emissions related to electricity or heat produced off-site) account for 4.6% of total global GHG emissions. They originate from end-use equipment, but are driven in part by the energy efficiency of buildings and thus by LLKS (Group 3).
18. The calculations are based on the following conservative assumptions: (1) shares in emissions of the electricity & heat, transportation, and housing sectors remain constant over time in the business-as-usual scenario; (2) capital stock in each sector is evenly distributed across vintages, with average lifetimes of 100, 70, and 40 years in the housing, transportation, and electricity & heat sectors, respectively; (3) baseline emissions are 50%, 80%, and 100% higher than 2000 emissions in 2030, 2050, and 2100, respectively; and (4) emissions reductions in 2030, 2050, and 2100 are to meet given GHG atmospheric concentration targets according to table 3.5 and .17 in Fisher et al. (Citation2007). The results are not fundamentally altered if it is assumed that only half of the emissions from the electricity & heat, transportation, and housing sectors depend on LLKS.
19. The IEA (2012, p. 25) has made a similar point: ‘if action to reduce CO2 emissions is not taken before 2017, all the allowable CO2 emissions would be locked-in by energy infrastructure existing at that time’. Similarly, Davis, Caldeira, and Matthews (Citation2010) have estimated that a 1.1 °C to 1.4 °C increase in the global average temperature by 2100 is already locked in due to emissions from existing energy supply infrastructure, thereby severely limiting the available margins of freedom.
20. This should be distinguished from two other types of path dependency such that (1) the past influences the future, and (2) the chosen path proves to be inferior, but only ex post (as detailed in Shalizi & Lecocq, Citation2009).
21. It is ironic that delaying the imposition of carbon commitments on developing countries until their per capita income is higher (a very laudable objective) runs the risk of missing the windows of opportunity to influence the carbon efficiency of LLKS to be built in the next two to three decades. This is one reason why the climate change negotiations cannot be separated from development objectives (Shalizi & Lecocq, Citation2010).
22. The Clean Development Mechanism (CDM) provides some incentive for mitigation in non-Annex B countries. However, the demand for CDM credits remains small relative to the number of potential mitigation projects. In addition, these credits are subject to the same 2012 time limit. Finally, because it is a project-based mechanism with high transaction costs, the CDM is ill-equipped to deal with investments in large-scale programmes or networks.
23. This difference arises because in practice there is no reason why the shadow price of carbon (which derives from the domestic policies and measures imposed on the sectors not covered by domestic carbon markets) should equal the price of carbon on formal carbon markets.
24. Uncertainty not only forces investors to trade off the possibility of lower emissions paths with the inefficiencies linked to potentially excessively conservative technological choices today, but ‘growing uncertainty’ places additional constraints on them. These uncertainties will often also be applied to targeted mitigation programs (see Section 4.4).
25. They generally do not last longer because of (1) increasing uncertainty as the horizon is extended, (2) discounting, and (3) institutional limitations (e.g. difficulties in establishing and enforcing commitments for the very long run).
26. Here a ‘programme’ can either be the aggregation of a multitude of similar projects (e.g. the construction of multiple nuclear power plants in France) or the construction of a fully integrated network (e.g. the IHS).
27. The decision is suboptimal from society's point of view, because the decision maker does not take into account the fact that his or her decision locks in other decisions (and thus other emissions) down the road. This is the case when there are multiple decision makers (e.g. when several utilities compete in the power generation system), or when there is one decision maker who reasons on a project-by-project basis only.
28. Thus highlighting the importance of monitoring project/network performance.
29. There has been an expansion of private participation in infrastructure provision (Kassides, Citation2004), but the scale of private participation remains small relative to infrastructure provision needs.
30. This is one reason for considering a ‘trading band’ with a price floor and ceiling that becomes narrower with time as emissions targets are tightened.
31. In addition, mitigation programmes financed by the international community can in principle overcome this issue by providing lower rates of interests, with potentially high leverage (Mathy, Hourcade, & de Gouvello, Citation2001).
32. There is an emerging literature that discusses PPPs in the context of climate change (e.g. Martimort & Straub, 2012).
33. Note that the use of carbon finance may itself face barriers, as it is a new financial instrument that requires specific skills to be used. The global knowledge and expertise about carbon finance has yet to be established. (In fact, it appears that newly established carbon desks in financial institutions have been disbanded with the economic crisis.)
34. Even if carbon taxes and carbon markets impact projects’ balance sheets differently, and even if they have different implications for public budgets (depending on how they are set up), carbon taxes are likely to face the same limitations as carbon markets vis-à-vis low-emissions LLKS projects/networks, namely limited coverage (geographically and over time), the necessity of a complementary mechanism to take indirect/induced emissions into account, the need for upfront project/network financing, and the need for a policy package to create a level playing field between low- and high-emissions LLKS options.
35. For example, governments’ ability to identify and support the most cost-effective low-carbon LLKS with ‘targeted mitigation programmes’ is questionable.
