INFOTERRA: News: Report - Capital Investments Affect Climate Change
[For the report cited below, see:
http://www.getf.org/file/toolmanager/CustomO16F37186.pdf
Also, see the Pew Center report, Discounting the Benefits of Climate
Change Mitigation, at:
http://www.pewclimate.org/projects/econ_discounting.pdf]
Report Shows How Capital Investments Affect Climate Change
Source The Green Business Letter <http://www.greenbizletter.com/>
URL: <http://www.greenbiz.com/news/news_third.cfm?NewsID=23507>
WASHINGTON, D.C., Dec. 31, 2002 - One key source of greenhouse gas (GHG)
emissions is the capital equipment that supports the world's economic
activity. Capital stock, such as power plants, factories, and
transportation infrastructure, is expensive and can last for decades.
Such capital also presents important and conflicting constraints on
policy-makers attempting to reduce society's GHG emissions. On the one
hand, attempts to reduce emissions too quickly may create a drag on the
economy if they force the premature retirement of capital. On the other
hand, delaying reductions may raise the cost of future actions because the
facilities built today can still be polluting decades from now.
A new report from the Pew Center on Global Climate Change aims to help
policy-makers better understand the patterns of capital investment and the
factors that affect these patterns. Pew commissioned Robert Lempert,
Steven Popper, and Susan Resetar of RAND, and Stuart Hart of the
Kenan-Flagler Business School at UNC-Chapel Hill, to analyze the
literature and interview top decision makers in leading U.S. firms.
The report, Capital Cycles and the Timing of Climate Change Policy offers
several findings. Among them:
Capital has no fixed cycle. Despite the name, there is no fixed capital
cycle. Rather, external market conditions are the most significant
influence on a firm's decision to invest in or decommission large pieces
of physical capital stock. In particular, firms strive to invest in new
capital only when necessary to capture new markets. Firms most commonly
retire capital when there is no longer a market for the products they
produce and when maintenance costs become too large.
Capital investments may have long-term implications. Today's capital
investment decisions can have implications that extend for decades.
Capital stock is expensive, and firms often have little economic incentive
to retire existing plants. The environmental performance of capital stock
is not fixed over time and can improve as a firm makes minor and major
upgrades. Nonetheless, there are limits to such upgrades, so that
investment decisions made today may shape U.S. GHG emissions well into the
21st century.
Equipment lifetime and more efficient technology are not significant
drivers in the absence of policy or market incentives. It is often assumed
that the engineering and nominal service lifetimes of physical equipment
are important determinants of the timing of capital investment. The Pew
study found that the physical lifetime of equipment does drive patterns of
routine maintenance in different economic sectors, but it appears to be a
less significant driver of plant retirement or for investment in new
facilities. With regular maintenance, capital stock can often last decades
longer than its rated lifetime.
In addition, discussions of climate change policy often highlight the
potential of new technology to enable low-cost reductions in GHG
emissions. Pew found that however beneficial such technology may be, it
will likely have little influence on the rate at which firms retire older,
more polluting plants in the absence of policies promoting technology or
requiring emissions reductions.
Firms focus investment towards key corporate goals. In particular, firms'
capital investment is often driven by the desire to capture new markets.
Uncertainty is a recurring theme: Capital investment decision processes
are shaped by the desire to reduce the potential regret due to adverse or
unforeseen events over the long lifetime of capital stock.
The long lifetime of much capital stock may slow the rate at which the
U.S. can obtain GHG emission reductions. Firms are often reluctant to
retire capital and attempts to force them to do so on a short-term
timetable can be costly. Sporadic and unpredictable waves of capital
investment make it more difficult for climate policy to guarantee low-cost
achievement of fixed targets and timetables for GHG emissions reductions.
Reductions may be more rapid during periods of significant capital
turnover and less rapid otherwise.
The report makes several recommendations for policy makers for incentives
that encourage the retirement of inefficient capital stock in favor of
more efficient, less polluting technologies.
Copies of the full report may be downloaded in PDF format here
<http://www.greenbiz.com/toolbox/reports_third.cfm?LinkAdvID=37186>.
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