Capital Sunk, Emissions Locked: The Economics of Energy Transitions under Carbon Constraints

Abstract

Optimal energy transitions are characterized in an economy where fossil energy requires dedicated conversion capital that is costly to reverse and where cumulative emissions are capped by an exogenous carbon budget. Short-run complementarity between fossil inputs and sector-specific capital interacts with intertemporal scarcity of the remaining budget. The optimal path typically selects an expansion regime, a production plateau, a decline regime, and a post-fossil steady state. The plateau is pinned down by the need to operate in order to amortize sunk conversion capital while the shadow value of remaining emissions rises over time. These forces generate non-monotone useful-energy prices and deliver sharp conditions under which dedicated fossil capital becomes stranded.

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Reference

Michel Moreaux, Jean-Pierre Amigues, and Manh-Hung Nguyen, “Capital Sunk, Emissions Locked: The Economics of Energy Transitions under Carbon Constraints”, TSE Working Paper, n. 26--1721, February 2026.