Why Is There Still Investment in Polluting Capital? Stranded Assets and Climate Policy Uncertainty

Abstract

Despite governments’ commitments to limit global warming to 1.5°C, there is still investment in carbon-intensive capital. This paper uses a growth model featuring irreversible investment, capacity utilisation, clean and polluting capital to study this apparent paradox. It shows that current investment in polluting capital and CO2 emissions are coherent with expectations of a future carbon tax, if investors also expect a bailout of polluting capital. This result implies that governments’ credibility can play an important role in reducing the cost of implementing an optimal carbon tax by committing not to bail out. However, there exists a temptation for a short-sighted government to boost output and consumption in the short run by announcing a future bailout.

Draft available on request.

Citation

@techreport{Huleux2026,
author = {Raphaël Huleux},
year = {2026},
title = {Why Is There Still Investment in Polluting Capital? Stranded Assets and Climate Policy Uncertainty}}