Article,
Stranding ahoy? Heterogeneous transition beliefs and capital investment choices
Affiliations
- [1] Roskilde University [NORA names: RUC Roskilde University; University; Denmark; Europe, EU; Nordic; OECD];
- [2] Università di Bologna [NORA names: Italy; Europe, EU; OECD];
- [3] Environment Agency Austria [NORA names: Austria; Europe, EU; OECD];
- [4] King Abdullah University of Science and Technology [NORA names: Saudi Arabia; Asia, Middle East];
- [5] Offshore Renewable Energy Catapult [NORA names: United Kingdom; Europe, Non-EU; OECD]
Abstract
Individuals have heterogeneous beliefs regarding the future speed and shape of the low-carbon transition. In this paper, we study to what extent opinion diversity matters for aggregate capital investment decisions. We develop a model where firms formulate heterogeneous expectations around a dominant narrative, or ‘market norm’, with their dispersion increasing over a finite planning horizon. Our analytical and numerical results suggest that belief heterogeneity can significantly affect the share of low-carbon investments, with the strength of its effects non-linearly correlated to market norms. We show that investment behaviour tends to be more sensitive to shocks to short-term, rather than long-term, belief heterogeneity, highlighting the importance of setting credible short-term targets. Finally, we find beliefs to interact strongly and in non-trivial ways with measures of short-termism, with increasing agents' farsightedness not necessarily leading to less carbon-intensive investments under high heterogeneity.