Waiting for the transition: The role of expectations in the decarbonisation of the electricity sector
Authors: Louison Cahen-Fourot, Emanuele Campiglio, Louis Daumas, Michael Miess, Andrew Yardley
To study the decarbonisation of physical capital, we develop a macroeconomic model of the low-carbon transition of the electricity sector in a closed economy in discrete time. The structure of our modelling framework is based on the representation of the physical and financial stocks and flows of heterogeneous macroeconomic sectors.
Our approach extends the existing literature in macroeconomic modelling of transition dynamics along several dimensions. Firstly, we innovate the view on the role of expectations in transition processes by developing a novel bounded rational but forward-looking expectation formation mechanism. Secondly, this allows us to combine long-term views on system change with more short-term and profit-oriented investment logics in a coherent framework. Thirdly, we incorporate discrete choice theory based on probabilistic distributions of future utilization of capital stocks and profits to derive investment choices for heterogeneous capital goods today that have different environmental implications for the future and are subject to path dependency. Using our approach, we can provide insights on a wide range of issues that concern transition dynamics. This includes a novel analytical view on how stranding of physical assets can occur as a phenomenon resulting from coordination problems on a macroeconomic level due to uncertainty and different beliefs about the future.
Further potential applications of our framework are numerous: we can create taxonomies of transition dynamics following different levels of policy interventions, assess the macroeconomic effects of decommissioning of fossil-based capital stock, evaluate the effects of different expectations by key agents regarding logistic and exponential transition trajectories in slow- or fast-growing economies, and simulate the effect of differentiated interest rates applied to high- and low-carbon technologies on decarbonisation pathways.
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